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Managing Volatility: Considerations for Taiwan investors and businesses

What's inside

Key legal developments in 2022 and their implications for Taiwan

Executive Summary

After withstanding the impact of COVID-19 in 2020, 2021 witnessed a sharp rebound globally across capital markets, private equity, finance and other corporate deal-making. The rebound was expected—the combination of the pressure to deploy significant amounts of raised capital and pandemic-driven asset value distortion presented attractive value propositions for many stakeholders. The magnitude of the rebound, however, was unexpected. 

The exuberance carried over into early 2021, but when the Ukraine conflict started in February 2022, it exacerbated ongoing geopolitical fractures 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.

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 in a prime position to capitalize on Taiwan's critical role in global trade once normalcy resumes.

Following our 2022 Taiwan webinar series in September and October, we hope this year's report for Taiwanese businesses and investors provides helpful guidance during a volatile time.

We begin with an overview of the current state of affairs 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 economic decoupling globally. In addition, global FDI regulatory regimes have rapidly matured to the point where it is critical for Taiwanese investors and businesses to ensure maximum deal certainty by considering FDI analysis as probably the most important task they need to manage before embarking on any cross-border investments relating or peripheral to critical infrastructure and technologies.

We then summarize recent European Union court judgments that established what is deemed anti-competitive behavior in the context of exclusivity rebates. Taiwanese businesses trading in dominant positions in the EU should carefully weigh the impact of these judgments on trading practices.

Next, we provide our thoughts on the trends and headwinds in M&A and corporate transactions relating primarily to Taiwan and the rest of the Asia-Pacific region. We hope the thematic investment developments, changing jurisdictional focus and the excess liquidity data points flagged in the overview will help guide investors and businesses in their quest for low-beta high-alpha investments.

To underscore emerging thematic investment developments and value discovery in Taiwan and globally, this year we introduced a webinar session focusing on ESG. This is a rapidly evolving theme which, given its growing importance in the capital markets, financing and corporate transactions, is driving increasing regulatory regimes globally. Because of differing ESG compliance standards globally, investors and Taiwanese businesses should carefully consider the complexities in structuring a compliant and bankable ESG-focused transaction. 

This year, we also introduced a webinar session focusing on fund formation. In our report, we summarize the concept of a continuation fund, a fund product that may be of interest amid volatility, and which has affected fund exits.

And finally, we summarize the state of affairs in global sanctions. The CHIPS and Science Act, which came into force in August 2022, is particularly relevant to Taiwan semiconductor companies. Given Taiwan's dominant position in the global semiconductor industry, this legislation has significant impact on the industry's supply chain and economics.

We look forward to discussing these and other issues with you.


Taiwanese businesses and investors must weigh foreign direct investment considerations

While most FDI regimes encourage foreign investment, the growing number and greater sophistication of regimes can add to transaction uncertainty.


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Key 2022 judgments apply a five-factor analysis outlined by the EU's highest court in 2017.

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M&A headwinds and tailwinds

How Taiwanese and other firms have weathered 2021’s perfect storm and its aftermath.

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Sustainable finance: The road so far and a look ahead

As stakeholders embrace ESG considerations, risks, opportunities and challenges to integration remain


Continuation funds emerge as attractive options for PE fund managers and investors

These funds create opportunities, but can present legal and business challenges.

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Trade: Taiwanese businesses must manage competing US and mainland Chinese demands

Understanding the recent ban of certain chips to China and the new semiconductor-related export controls


Taiwanese businesses and investors must weigh foreign direct investment considerations

While most FDI regimes encourage foreign investment, the growing number and greater sophistication of regimes can add to transaction uncertainty

9 min read

Foreign direct investment (FDI) regimes continue to proliferate and mature globally. Given their increasing ubiquity and potential impact on deals, parties must prioritize FDI when considering cross-border M&A transactions. Rapidly evolving geopolitical dynamics, technological advancements and unpredictable externalities (like the COVID-19 pandemic) can add additional layers of transactional uncertainty when dealing with FDI. Given this climate, Taiwanese businesses and investors should carefully prepare for FDI regulatory scrutiny when contemplating acquisitions and ensure they build sufficient protections into transactions. It is key to anticipate as early as possible any concerns that FDI authorities may raise and potential conditions/remedies that might be required to address those concerns. 

We are seeing a continued prioritization and focus on FDI reviews in the US, various key European states and other countries. In the US, foreign investment remains generally welcome and encouraged, but transactions that might present US national security considerations are being scrutinized more thoroughly than ever. In Europe, new and updated FDI regimes are being implemented and FDI regimes are being proposed for a number of countries. 

The business activities of many Taiwanese companies now often fall squarely within the range of interest areas for FDI regimes. Sensitive sectors are no longer limited to the traditional areas associated with high-level national security, such as defense, energy and telecommunications. Instead, FDI regulatory scrutiny encompasses, for example, biotechnologies, various critical and emerging technologies, and data-related activities. 

Moreover, the COVID-19 pandemic brought FDI into sharper focus and accelerated movement on a national level across Europe and elsewhere around the world. Governments were concerned about the potential for foreign investors to take opportunistic advantage of companies in distress, and more generally about the resilience of supply chains which, nearly three years following the start of the pandemic, continues to be a concern. 

In certain countries, it is also possible that Taiwanese investors will be scrutinized for ties to or influence by China, if not considered outright Chinese, depending on local policy. 

While certain China-related deals can succeed, regulators can remain skeptical of these investments, especially if they occur in a sensitive sector, so, when relevant, such considerations must be carefully assessed as part of deal planning.

Open investment in the US with increased scrutiny

In the US, the Committee on Foreign Investment in the United States (CFIUS) review process remains a key consideration for deals. In 2021, transactions filed with CFIUS increased nearly 40 percent from 2020, underscoring CFIUS's growing impact on deals. This was the first year that the Foreign Risk Review Modernization Act of 2018 (FIRRMA) was fully implemented. Although CFIUS filings reached all-time highs, CFIUS has mostly maintained its efficiency in reviewing and clearing transactions—and the vast majority of transactions continue to be approved without mitigation. That said, where mitigation is required, it can substantially impact a transaction and result in unexpected challenges, delays and costs. Accordingly, careful diligence and planning remains critical.

Although CFIUS is generally maintaining its efficiency and clearing most cases, it is evident that scrutiny of FDI into the US remains a priority for the US government. In September 2022, President Biden issued the first-ever Presidential Directive defining national security factors for CFIUS to consider in evaluating transactions. Although the executive order (EO) did not affect CFIUS's processes or legal jurisdiction, it did signal the administration's focus on identifying national security risks arising from foreign investment and highlighted particular areas of national security interest. Specifically, the EO directed CFIUS to consider issues relating to supply chain resilience, impact on US technological leadership, assessment of aggregate investment trends in industries, cybersecurity risks and sensitive data. 

Notably, the EO directs CFIUS to consider industry investment trends over time in reviewing a transaction's impact on national security, rather than focusing narrowly on the specific transaction before it. The EO also provided guidance with respect to a standard for “sensitive data” that is much broader than what is defined as “sensitive personal data” under the CFIUS regulations for TID (technologies, critical infrastructure and personal data) US businesses, which are certain types of businesses subject to expanded CFIUS authorities under FIRRMA. 

CFIUS is also increasing its focus on monitoring and enforcement. In October 2022, CFIUS released its first-ever enforcement and penalty guidelines. Although CFIUS has only previously announced two penalties, these guidelines, combined with consistent messaging from CFIUS officials over the past several years about an increased effort on monitoring and enforcement, indicate that CFIUS likely intends to use its enforcement authority more going forward. This emphasizes the importance of understanding and satisfying mandatory filing requirements as well as complying with any mitigation requirements required by CFIUS.
The EO, the 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.

Growing regimes in Europe

FDI regimes continue to ramp up in Europe. In 2021, three EU member states adopted a new FDI screening mechanism, six (including Germany, France and Italy) expanded existing regimes and seven initiated consultative or legislative processes to introduce new regimes. Seven other EU member states with established FDI regimes made no changes in 2021. The European Commission (EC) expects all 27 member states to have an FDI regime in the near future.  

As an example of developments, Sweden and Belgium both introduced new legislation that, if enacted, would take effect 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 would be subject to mandatory notification (e.g., essential services, security/military, critical raw materials, data, emerging technology). On June 1, 2022, the Belgian government and federated states entered into an agreement to implement an FDI law that would subject acquisitions of 25 percent or more of the voting rights in certain Belgian companies operating in critical infrastructure, critical technologies or raw materials essential for security, defense and military equipment— or 10 percent or more of the voting rights in certain target companies active in defense, energy, telecommunications and cybersecurity—to a notification requirement. Cyprus and Ireland are also actively debating FDI legislation. 

There is also continued coordination on FDI review within the EU. The EU screening regulation has been in full operation since October 2020. National screening authorities now must notify all deals they screen to the EC and the other member states, which can then ask questions and provide comments or opinions—which they actively do in deals of interest. The EU screening regulation does not delegate veto or enforcement rights to the EC. This means that individual member states continue to control FDI reviews for their jurisdictions. At the same time, each reviewing member state must consider the observations of the EC and other member states.

Outside of the EU, Switzerland is also considering an FDI regime, a surprising move for a jurisdiction traditionally open to foreign investment. In the UK, the new investment screening regime took effect in January 2022 and now enforces a mandatory pre-screening mechanism for 17 specific designated sectors, with the UK government having broad jurisdiction to review transactions. 

While statistics show that most of the transactions are cleared without difficulties and prohibition cases are rare, FDI authorities within the EU member states are increasingly using conditional clearances to address national security concerns. 

Impact on Taiwanese companies and investors

An encouraging sign for Taiwanese companies and investors is that most FDI regimes openly encourage foreign investment. The EU has stated unequivocally that it wants to remain an attractive place for foreign investments. With the EU cooperation mechanism in full swing, many screening agencies are learning quickly and becoming more pragmatic. Similarly, the US has repeatedly reemphasized its longstanding policy of encouraging foreign investment. This emphasis is supported quantitatively, as the vast majority of transactions reviewed by CFIUS are approved without mitigation and, as CFIUS is still mostly a voluntary process with mandatory filings only being triggered if certain criteria are met, there are many transactions subject to CFIUS's jurisdiction that are not reviewed at all.

On the other hand, the increased number of FDI regimes and greater sophistication of existing regimes can contribute to transaction uncertainty. EU member states and other European nations, the US and other countries are upgrading and strengthening their FDI regimes, while increasing their focus on protection of national strategic assets and concerns about the resilience of global supply chains since the pandemic.

Larger geopolitical dynamics can also affect FDI reviews. For example, ongoing tensions between Europe and the US, on the one hand, and China on the other, have led to heightened sensitivity regarding Chinese investment. The two transactions blocked so far under the new UK FDI rules involved Chinese investors. In the US, there was a substantial decline in Chinese investment following the enactment of FIRRMA. In 2021, Chinese investors led all other countries in notices filed, though this was likely bolstered by a combination of factors including CFIUS's aggressive pursuit of non-notified transactions, CFIUS treating Hong Kong the same as China for purposes of its reporting, and Chinese investors electing in almost all cases to file via full notices rather than via short-form declarations. In addition to notified transactions, CFIUS is actively using its enhanced FIRRMA resources to identify and call in non-notified transactions of interest—including deals that closed years ago—and CFIUS has clearly had particular interest in non-notified deals linked to China.

Third-party ties and subsequent third-party threats are another key area of CFIUS focus. Under these scenarios, a national security threat might not arise directly from the foreign investor before CFIUS, but might arise instead from third parties connected to the foreign investor. The new CFIUS EO repeatedly emphasizes that CFIUS must carefully consider such third-party threats when reviewing transactions. Therefore, even for deals that do not involve investors from countries of particular concern, the investor's business dealings with such countries—including manufacturing, joint ventures, sales, funding and licensing arrangements—will be considered by CFIUS. 

Many focus areas for FDI authorities coincide closely with the business activities of a range of Taiwanese companies, particularly in the technology sector. Semiconductors have long been a sensitive area, and various other types of technology developments and priorities are likely to be viewed as relevant to national security concerns. For example, the CFIUS EO highlights microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy and climate adaptation technologies as relevant to US national security. 

Overall, it is clear that FDI is emerging as a significant multijurisdictional regulatory consideration that must be weighed carefully in cross-border deals. Accordingly, Taiwanese parties to cross-border deals must consider FDI issues in every relevant jurisdiction from the outset, so they can effectively manage risks, timing and FDI review processes. 

To do this effectively, Taiwanese investors must understand all of the target's activities and conduct an overall FDI risk assessment early in the deal process; develop a clear multijurisdictional strategy to address issues that may present challenges (including anticipating potential mitigation remedies that may be required for clearance to be granted); and allow sufficient time and resources for FDI review in the transaction schedule.

Michael Crowley (White & Case, Law Clerk, Washington DC) contributed to the development of this publication.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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