Given the potential problem of indirect interference by insurance companies in the management of companies that are invested by a Taiwanese venture capital fund in which the insurance companies have invested, which has arisen in the battle for the control and management rights of TECO Corporation in 2021, the Taiwan Venture Capital Association (the “Association“), in order to allay the competent authority’s concerns about the relatively loose regulation of Taiwanese venture capital funds, promulgated the “Self-Regulatory Regulations of Venture Capital Funds Receiving Investments from Insurance Companies” ( the “Self-regulation“), which has been approved and registered with the Industrial Development Bureau of the Ministry of Economic Affairs (the “MOEA“) on January 12, 2022. The Association hopes that through self-discipline, the fundraising, operation and management of Taiwanese venture capital funds can remain flexible to some extent.
In order to strengthen the self-regulation of venture capital funds, the MOEA announced on January 28, 2022 amendments to Articles 8 and 10 of the “Regulations for the Guidelines for Venture Capital Investment Industry”.
According to the current regulations of the Venture Capital Investment Industry Guidelines and relevant regulations, venture capital funds must apply for a letter of recommendation from the Office of Industrial Development, MOEA if they wish to apply for investments with certain types of investors engaged in regulated enterprises, such as the National Executive Yuan Development Fund, banking enterprises, insurance enterprises, securities companies, financial holding companies, etc. The fund that wishes to apply for a letter of recommendation from the Industrial Development Office of the MOEA to solicit investment from the insurance companies will have to sign the self-regulation as a precondition. If a venture capital fund is in material violation of self-regulation, the Industrial Development Office of the MOEA will refuse to issue a letter of recommendation to any other venture capital fund established or managed by the manager, representative or senior executives of the venture capital fund in violation within five years.
Accordingly, self-regulations are of utmost importance for Taiwanese venture capital funds that intend to solicit or have received investments from insurance companies. Among the Self-regulations, the most important articles are the following:
1.Venture capital funds must not, directly or indirectly, interfere in a contest for control or management rights of any of the companies in which they invest.
2.Venture capital funds expressly stipulate the following as part of the management service agreement, limited partnership agreement, operating plans or internal investment management rules and relevant documents: (a ) the plan and scope of the investment; (b) the amount of the capital contribution and the types of liabilities of the shareholders or partners; (c) the means, conditions and deadlines for capital contributions by shareholders or partners; (d) duration of the fund; (e) voting rights; (f) post-investment management mechanisms, such as regular provision of relevant financial reports, disclosure of beneficial ownership information, prevention of conflicts of interest, etc.; (g) the allocation of expenses, profits or compensation for losses; (h) transfer of interests; (i) agreed grounds for dissolution; (j) the withdrawal of capital contributions from shareholders or partners; (k) liquidation; (l) liabilities for breach of contract; (m) applicable law and dispute resolution; (n) modification of the contract; and (o) clauses expressly required under the Insurance Act, Articles 6 and 9 of the Regulations Governing the Use of Insurers’ Funds in Special Projects, Utilities and Welfare Companies and Associations of life and non-life insurance.
Abundant capital from Taiwanese insurance companies has always been what venture capital firms actively seek out; however, following the adoption of the proposed amendments to the Venture Capital Investment Industry Guidelines and Self-Regulation Regulation, we recommend that venture capital firms address the provisions of fund-building agreements and post-investment management issues in a more careful and prudent manner. cautious way.