Japanese acquisition of XPEC ends in breach of contract

  • Date: 2016-09-26

I. Background

On May 31, 2016, Japan’s Bai Chi Gan Tou Digital Entertainment Co. announced that it would launch a public tender offer to purchase 38 million shares, or a 25.71 percent stake, in Taiwanese gaming developer XPEC Entertainment Inc. at NT$128 (US$3.93) per share. On August 12, the Financial Supervisory Commission (FSC) received a complaint alleging possible breach of contract by Bai Chi Gan Tou. Because the informer did not provide concrete evidence, the acquisition was still in progress and the terms of acquisition had not yet been determined, the FSC promptly authorized the CTBC Bank Co. to look into the case and asked the Taipei Exchange to monitor XPEC stocks more closely.

Bai Chi Gan Tou finalized the terms of acquisition on August 18. But they were unable to make the scheduled payment by the August 22 deadline, and instead requested an extension until August 31. The FSC immediately moved to protect the rights of the seller (XPEC investors) by sending an official missive to the Japanese firm demanding a pledge of payment, as well as documentary evidence regarding share delivery and settlement operations. The commission also kept close tabs on the situation through CTBC Bank, and asked the Securities and Futures Investor Protection Center (SFIPC) to examine how to pursue compensation in the event of breach of contract.

On August 30, Bai Chi Gan Tou announced that it was unable to make payment to complete the acquisition. The FSC immediately ordered CTBC Bank to return all shares to the seller, becoming the first settlement default on a tender offer in the history of Taiwan’s equities market. As a result of the company’s bad faith failure to perform settlement, chairman Yoshiaki Kashino was charged with securities fraud and the case was referred to the Taipei District Prosecutors Office on September 2. The FSC also asked the SFIPC to begin legal action on behalf of XPEC investors, pursuing civil compensation and taking necessary procedures to protect their claims.


II. FSC punishes unlawful trading and protects investors

A. Probes into securities fraud, insider trading

  1. In the ensuing investigation into XPEC’s issuance and trading of convertible corporate bonds, the Taipei Exchange discovered anomalies in the distribution and conversion of three tranches of such bonds that XPEC issued in 2015. Investigators also found allegations of insider trading and speculation on XPEC stocks, warrants and convertible bonds during the acquisition period. The case was transferred to prosecutors and investigated in conjunction with securities fraud allegations.


  1. As for CTBC Bank, the FSC determined that the bank failed to protect investors by neglecting Trust Enterprise Act regulations regarding internal control for acquisitions. The bank was fined the maximum penalty of NT$3 million (US$95,300) under the relevant provisions and barred from handling acquisition cases for three months. CTBC Securities, which served as Bai Chi Gan Tou’s financial advisor for the transaction, also failed to perform due diligence in vetting its client. Pursuant to the Securities and Exchange Act, the FSC handed CTBC Securities a three-month ban on providing financial planning and consultation services.

B. Protecting investors’ rights

  1. On August 30, the FSC notified the SFIPC to start pursuing civil compensation on behalf of XPEC investors and take necessary steps to protect their claims. The center’s website began accepting complaint applications from investors on September 1.
  2. The SFIPC on September 7 met with board members and supervisors to discuss matters concerning that civil compensation case, and from September 8 through September 20 accepted registration from XPEC investors for a class action lawsuit. The center has initiated procedures to seize assets and will initiate a class action against Bai Chi Gan Tou. If necessary, the center is prepared to seek overseas compensation from the Japanese firm.


III. Reviewing the public tender offer system, strengthening market regulation

A. Taiwan’s public tender offer system was designed to allow shareholders to obtain relevant information regarding any public acquisition and promote openness and fairness in equity acquisitions, and draws on regulations drafted by the U.S. and other countries. The system emphasizes open disclosure of acquisition procedures and information, while also providing the flexibility and timeliness required for mergers and acquisitions. Before proceeding with a public tender offer, prospective buyers must declare their intentions and submit an application to the FSC.

B. Having researched regulations from other countries, the FSC asked the SFIPC to consult with businesses and experts on how best to improve Taiwan’s relevant laws and regulations, particularly in regard to strengthening protection for investors in public tender cases (i.e. requiring financial consultants or authorized institutions to conduct a full background check on the buyer and verify their financial sources).


IV. Conclusion

To maintain order in the securities market and protect the rights of investors, the FSC will hold Bai Chi Gan Tou accountable for its bad faith failure to perform settlement. The SFIPC has also begun accepting applications from affected investors to pursue civil compensation on their behalf. Given that the capital market operates on the basis of fairness, integrity and openness, the government will take swift and sure action against dishonest practices and will work with capital market participants to ensure continued growth and robust operation in capital markets.