Initial Public Offering (IPO) Equity Planning

As their self-founded companies or family businesses steadily grow, entrepreneurs may consider the necessity of taking their businesses public through an IPO. The advantages of an IPO include the ability to raise capital from the capital market, increased stock liquidity, enhanced corporate equity value, heightened visibility, the flexibility to attract and retain talent through employee incentive programs, and the establishment of robust systems and a healthy corporate structure. For family businesses, choosing an IPO can help them achieve their long-term sustainability goals. However, the IPO process comes with various challenges and issues. The following analysis focuses specifically on IPO-related equity considerations.

I. Requirements for Listing

1. Capital
   The required IPO capital depends on the scale of business operations and growth. The listing requirements stipulate a minimum capital of NT$600 million for IPO applications, with a minimum of 30 million shares. For listing applications, the minimum capital is NT$50 million with a minimum of 5 million shares. The capital can be sourced from capital surplus or surplus reserve increase, cash increase, sale of existing shares, conversion of employee stock options, and other methods.
2. Equity Distribution
   When applying for an IPO, companies must release at least 20% or 10 million shares to external shareholders. Additionally, for listing, the number of external shareholders must reach 500, while for over-the-counter listing, it must reach 300. By distributing equity, IPOs can strategically introduce strategic investors, partners, or use it for employee compensation programs, which positively contribute to the company’s operations.

II. Investment Structure and Equity Composition

During the process of external fundraising and equity distribution through an IPO, the ownership of company founders or family businesses may be diluted. Therefore, designing an investment structure and equity composition that ensures stability of management rights, reduces shareholder tax burden, and aligns with the goals of business succession is an important issue for entrepreneurs and family businesses to consider.

1. 1. Investment Structure
   The pre-IPO investment structure restructuring needs to consider factors such as business development, external environment, investor requirements, and regulatory limitations. IPOs can be conducted domestically or internationally and can be listed on the Taiwan Stock Exchange or return to the domestic market. Different IPO entities also entail different tax burdens for shareholders.
2. 2. Equity Composition
   Based on current practices under Taiwanese corporate law, there is a strong correlation between equity ownership and management rights. When planning equity distribution, the following equity structure considerations should be taken into account:

– Absolute Control (over 2/3 or 67% equity): Enables complete control over major decisions through shareholder meetings (special resolutions such as amendments to articles of incorporation, removal of directors and supervisors, etc.), allowing complete dominance over significant corporate issues.
– Relative Control (majority or 51% equity): Enables control over the company’s management rights through ordinary resolutions.
– Protective Control (over 1/3 or 34% equity): Ensures stability of management rights and veto power over major proposals.

If a company holds less than 1/3 of the shares, it is important to be aware that minority shareholders can easily acquire management rights through public market acquisitions. For example, under Article 173-1 (similar circumstances) of the Company Act, if a market party holds more than half of the shares for over three months, they can convene a shareholders’ meeting to elect new directors and supervisors.

Furthermore, corporate equity control is an important tool for family business succession. To avoid the dispersal of equity and its impact on management rights, family businesses often choose to establish a holding company separate from the operating entity, effectively consolidating personal equity control through a closed holding company structure, facilitating multi-generational succession of the family business.

III. Tax Considerations

For companies going public in Taiwan, shareholders should be aware of tax considerations related to equity transfer and profit distribution. When transferring equity (prior to listing), securities transaction income generated should be subject to the minimum tax burden. It is advisable to complete the transfer of individual shareholders’ equity through gifting before the listing. In terms of profit distribution, individual shareholders’ dividend income can choose between (1) consolidated taxation: inclusion in comprehensive income tax, with a deductible rate of 8.5% capped at NT$80,000; or (2) separate taxation: separate taxation at a single tax rate of 28%. Corporate shareholders’ distributed dividends are not subject to income tax. However, if earnings are not distributed, a 5% tax on undistributed earnings applies.