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Title Taiwan Securities Association Assessment and Auditing Procedures for Securities Underwriters Consigned to Prepare Underwriter Assessment Reports for Offerings and Issuance of Securities by Issuers CH
Date 2016.11.08 ( Amended )

Article Content

Article 1     These Assessment and Auditing Procedures are hereby adopted to unify the assessment work of securities underwriters in securities offering and issuance cases and enhance the functions of underwriters.
Article 1-1     Except in underwriting cases for public offerings of beneficial interest certificates by trustee institutions and public offerings of asset-backed securities by special purpose companies, underwriters guiding issuers in the offering and issuance of securities shall abide by the provisions of these Auditing Procedures.
Article 2     These Assessment and Auditing Procedures are general principle-oriented guidelines. The securities underwriters may, based on actual requirements in individual cases, add assessment and auditing procedures at their discretion to realize their function of providing guidance.
     The term "financial reports" in these Assessment and Auditing Procedures means the consolidated financial reports prepared pursuant to the applicable regulations governing preparation of financial reports as adopted by the competent authorities. If the issuer does not have any subsidiaries, it means the individual financial reports.
    Relevant vouchers and materials collected in accordance with these Assessment and Auditing Procedures shall be numbered and cross-indexed to facilitate referencing. (Where there are no items to be assessed and audited, or for items where auditing is not mandated by regulations, the notation "None" or "Not applicable" shall be added.) After completion of the auditing procedures, all materials and relevant attachments shall be compiled and bound together as a volume and a file created to serve as the working papers. The Statement of Auditing Standards No. 45 (Documentation), shall apply mutatis mutandis to the creation of such files.
    The term "over-the-counter (OTC) company" as used in these Assessment and Auditing Procedures means a company approved to be traded at the places of business of securities firms pursuant to Article 3 or Article 3-1 of the GreTai Securities Market (GTSM) Rules Governing Review of Securities Traded on Over-the-Counter Markets.
Article 3     Cash Capital Increase by Issuing New Shares (Including Preferred Shares with Warrants)
  1. The assessment report summary shall include, at a minimum, an industry overview, the issuer's competitive position and operational risks, and fund-raising effectiveness of the offering and issuance of securities in the most recent period and in the most recent three fiscal years.

    1. Operational risk for that industry sector:

      1. Compile relevant industry report materials to gain an understanding of the status quo in the industry.

      2. Meet and talk with business executives of the company and use internal financial and business materials of the company or externally-gathered industry reports and related materials as a basis to gain an understanding of peculiar cyclical demands or substitutable goods in that industry and their effects, and analyze the main factors that affect profitability in that industry sector, and the niches the company occupies within the context of each such factor. (*)

      3. Compile and analyze materials related to the up-stream, mid-stream, and down-stream industries of that industry sector.

    2. Operational risk of the issuer:

      1. Business:

        1. Compile domestic and foreign industry report materials to gain an understanding of possible changes in supply and demand in the market, and to analyze advantageous and disadvantageous factors affecting the company's futures development and corresponding countermeasures, to assess the company's ability to respond to changes in the economic climate.

        2. Compile information on the market share of the company's main competitors, to assess the company's competitive niche.

      2. Technical research and development and patent rights:

        1. Assessment opinions may be obtained from experts as evidentiary support.

        2. Obtain materials on the history, organization, personnel, academic and professional experience, and research results, and future plans, of the company's research and development (R&D) division(s), to gain an understanding of its primary sources of technology and the payment methods and amounts of compensation or royalty payments for technologies, and futures directions in R&D work, and analyze the numbers, average years of service, turnover, departure rate, and so forth of R&D division personnel, and assess the operational risk to the company posed by departure of R&D personnel. (*)

        3. Obtain any major technical cooperation contracts, and assess any operational risk to the company related to their content.

      3. Human resources analysis:
        4. Obtain the total numbers of employees, departed employees, laid-off employees, or retired employees, and direct or indirect laborers, and their average ages and average years of service, to assess variation in the departure rate and the risk to company operations. (*)

      4. Cost analysis of all major products:
        1. Obtain information on the expenses for raw materials, processing, and manufacturing for major products over the most recent period and the most recent three fiscal years, and analyze the risk posed to company operations by variation in cost element rates.

        2. In a case where a construction company has registered for offering and issuance, obtain reports on market prices in the local (or neighboring) areas, information on other companies in the same business, and housing price ratios provided by government agencies (such as ratios of appraised current values and government-announced current value or ratios of housing construction costs and land costs), to appraise whether the ratio of allocation between the company and the land owners is reasonable in cases of joint construction and separate sale, joint construction and allocation of housing units, or joint construction and allocation of ownership percentages. (*)

      5. Exchange rate changes: (*)
        6. Analyze the ratios during the most recent period and the most recent three fiscal years of the issuer's gains or losses on foreign exchange to its operating income, and ratios of domestic/foreign sales and domestic/foreign purchasing to analyze the risk to issuer operations posed by exchange rate changes, and the issuer's hedging measures.

  2. The business and financial condition of the issuer:

    1. Business condition:

      1. Obtain basic information and sales agreements for the top 10 customers or any customers accounting for 5 percent or more of the issuer's annual net operating revenue in the financial reports for the most recent period and the most recent three fiscal years, and perform sample checking of related vouchers to inspect whether there are any material discrepancies in the sales prices or trading terms and conditions given to those customers, and use means such as written confirmations or on-site observation or collection of other sufficiently probative supporting materials to gain an understanding of the operations of those customers, their relationships with the issuer, the objectives of the transactions, and the necessity of the transactions, to assess whether there has been any inflation of earnings. Provided, if it is prohibited by contract to disclose the customer's name, or the trading counterpart is an individual and is not a related party, that party may be represented by a code name. (Attachments 1, 2)

      2. For the top 10 customers or any customers accounting for 5 percent or more of the issuer's annual net operating revenue in the most recent period and the most recent three fiscal years, inspect and analyze whether there has been any irregularity involved in any material increase or decrease in the amount of the issuer's sales to that customer, and assess whether there is any risk from sales concentration.

      3. Meet and talk with business executives of the company to gain an understanding of the company's sales policies.

      4. Obtain basic information and sales agreements for the top 10 suppliers or any suppliers accounting for 5 percent or more of the issuer's annual net purchases in the financial report of the most recent period and the most recent three fiscal years, and perform sample checking of related vouchers to inspect whether there are any material discrepancies in the purchases, prices or terms and conditions of trading from those suppliers, and use means such as written confirmations or on-site observation or collection of other sufficiently probative supporting materials to gain an understanding of the operations of those suppliers, their relationships with the issuer, the objectives of the transactions, and the necessity of the transactions, to assess whether there has been any false purchase invoices.

      5. Obtain the annual purchase quantities and unit prices of the raw materials of the issuer's main products during the most recent period and the most recent three fiscal years, and compile information on general market prices, and compare it for any material irregularities.

      6. Obtain the financial reports and parent company only financial reports for the most recent period and the most recent two fiscal years, and analyze the reasonableness of changes in receivables. Explain the parent/subsidiary companies' bad debt allowance policies, and assess the adequacy of allowances provided, and additionally assess the probability of collection of the accounts receivable, and compare and assess against those of other companies in the same business.

      7. Obtain the issuer's financial reports and parent company only financial reports for the most recent period and the most recent two fiscal years, and analyze the reasonableness of changes in net inventories, and explain and assess the adequacy of provisions for loss due to price decline of inventory and loss due to obsolete and slow moving inventories for the parent and subsidiary companies, and compare and assess against those of other companies in the same business.

      8. Obtain the issuer's internal information and compile relevant industry reports and analyze whether there have been any irregular changes in business results in the financial reports for the most recent period and the most recent three fiscal years; additionally, analyze, by division or main product types, changes in operating revenue, operating cost, and gross operating profit in the financial reports for the most recent period and the most recent three fiscal years (Attachments 3 and 4). If changes in operating revenue or gross profit reach 20 percent or more in the financial reports for the most recent period and the most recent three fiscal years, an analysis of price and sales volume shall be performed, and the reasonableness of the fluctuation shall be assessed. (Attachment 5)

      9. Review the issuer's financial reports, internal materials, and legal opinions over the most recent period and the most recent three fiscal years, to ascertain the reasonableness of the business transactions of the issuer and its subsidiaries with related parties (including transactions among the parent and subsidiaries), and whether there have been irregular transactions. If it's a sale of products to a related party, relevant information shall be obtained on the credit policy, transaction terms, payment collection, and subsequent use of the products for production or re-sale by the related party shall be obtained, to determine the reasonableness thereof. In the event that such transactions are inconsistent with general trade practices, the reason for such discrepancies and the reasonableness thereof shall be determined.

        1. Review the issuer's and its affiliated enterprises' financial reports and information on their major business or major products, sales channels, and sales revenue over the most recent period and the most recent three fiscal years, to ascertain whether the issuer and its affiliated enterprises' main business or products (those accounting for not less than 30 percent of the total operating revenue of each in each of the past two fiscal years) are mutually competing.
        2. Investments by the issuer and each of its subsidiaries in other companies (including any mutual investment among the parent and subsidiaries) :

          1. Where there is a material impact on the investee company:
            2. Obtain financial reports and relevant information of the investee company on which there is a material impact to understand its major scope of business and operational conditions, and whether the company has experienced operational or financial difficulties to the most recent quarter, and the impact on the issuer.
            Understand the share of the profit/loss and dividend distributions of the subsidiaries, affiliated enterprises, and joint ventures accounted for using the equity method in the most recent period and the most recent three fiscal years (the amount of profit remittances from investee enterprises overseas should also be listed). (Attachment 6)
            Obtain the issuer's financial reports and account books for the most recent period and the most recent three fiscal years to determine whether there is any violation of Article 13 of the Company Act.
            Obtain relevant information on the use of the issuer's and each of its subsidiaries' (including any transactions among the parent and subsidiaries) resources and technologies by the investee company on which there is a material impact to determine the reasonableness of the consideration or technology licensing fees paid by the investee company.
          2. Where there is controlling power over the investee company:
            3. The auditing procedures in 3.2.A.j.II.i shall apply mutatis mutandis to the current capital increase plan.
            Review relevant information on product purchase and sale, credit policies, transaction terms, and payment settlement between the issuer and each of its subsidiaries and the investee company over which it has control (including transactions among the parent and subsidiaries) to determine their reasonableness and the presence of any irregularities. (Attachment 6-1)
          3. Where there is existing or planned indirect investment in the Mainland Area: (*)
            4. Audit the issuer's investments in the Mainland Area and, where any of the below circumstances exist, determine whether the company has counted it toward its maximum quota of Mainland Area investment, applied for approval from the Investment Commission of the Ministry of Economic Affairs, and duly disclosed its relevant Mainland Area investments:
            The term "investment," pursuant to Article 4 and Article 6 of the Regulations Governing Permission for Investment and Technical Cooperation in the Mainland Area of the Investment Commission, Ministry of Economic Affairs, includes the following circumstances:
            A. The company has provided security or a guarantee for a foreign loan for the purpose of investment in the Mainland Area.
            B. The company has obtained shareholding in a company in a third region that has [investment in] a Mainland Area enterprise accounted for under the equity method, and meets the conditions of Article 4, paragraph 1, subparagraph 3 of the Investment Commission's Regulations Governing Permission for Investment and Technical Cooperation in the Mainland Area.
            C. A company in a third region has initially invested in a Mainland Area enterprise using its own funds or a bank loan or equipment and machinery, and the company provides a capital increase for the third-region company, while meeting the conditions of Article 4, paragraph 1, subparagraph 3 of the Investment Commission's Regulations Governing Permission for Investment and Technical Cooperation in the Mainland Area.
            D. The company raises funds to invest in a company in a third region, which at the time of investment had made no investment in the Mainland Area but subsequently utilized the funds from the capital increase to invest in a Mainland Area enterprise, and the company meets the conditions of Article 4, paragraph 1, subparagraph 3 of the Investment Commission's Regulations Governing Permission for Investment and Technical Cooperation in the Mainland Area.
            E. The company raises funds to purchase machinery and equipment, and subsequently invests in a Mainland Area enterprise via investment in a third region using such machinery and equipment as the price of the investment.
            Calculation of the maximum quota for Mainland Area investment:
            Foreign currency conversions with respect to the Mainland Area investment amount shall be based upon the cash foreign exchange buy rate quoted by the Central Bank at the time of the filing with the Investment Commission.
            Equity attributable to owners of the parent shall be calculated on the basis of the financial reports for the most recent period audited and attested (or reviewed) by a CPA.
            Review the minutes of the directors' and shareholders' meetings, the approved dates and amounts of investment approved by the Investment Commission, and the amounts invested to date, to understand any indirect investments carried out in the Mainland Area by the company and the share of the profit/loss and dividend distributions of the subsidiaries, affiliated enterprises and joint ventures accounted for using the equity method in the most recent period and the most recent three fiscal years, and to determine their impact on the financial condition of the issuer. (Attachment 10)
      11. Increase or decrease in property, plant and equipment, and investment property and management thereof: (*)

        1. Collect information on increases or decreases in the issuer's property, plant and equipment over the most recent period and the most recent three fiscal years.

        2. Collect information on relevant assets management rules of the issuer to understand its management of property, plant and equipment, and investment property.

      12. Funds management:

        1. Review the financial reports, parent company only financial reports, and account books of the most recent period and the most recent three fiscal years to assess whether there is any violation of Article 15 of the Company Act.

        2. Obtain relevant information on authority to approve fund allocation, the decision makers, and their positions.

    2. Financial condition:

      1. Obtain the issuer's profit and loss information on the financial reports for the most recent period and the most recent three fiscal years, and compare it with that of other companies in the same business to understand the changes therein and assess the advantages and disadvantages thereof. (Attachment 7)

      2. Obtain the financial ratio analysis statements of the issuer in the financial reports for the most recent period and the most recent three fiscal years, and compare them with those of other companies in the same business to understand the changes therein and assess the advantages and disadvantages thereof. (Attachment 8)

      3. Review the financial reports certified by a CPA and obtain the issuer's management representation letters or legal opinions from lawyers to determine whether the issuer has experienced financial difficulties in the most recent period and the most recent three fiscal years and the impact on the company's financial condition. (*)

      4. Review the financial reports certified by a CPA and obtain the issuer's management representation letters to gain an understanding of any major property transactions, endorsements/guarantees, material commitments, loans of funds to others, or derivative financial product transactions engaged in by the issuer and its subsidiaries with related parties or other companies (including transactions among the parent and subsidiaries) over the most recent period and the most recent three fiscal years, and perform sample checking of relevant vouchers, to analyze whether there are any irregularities and the impact on the company's financial condition. (Attachment 9). (*)

      5. Property, plant and equipment, and investment property or long-term equity investments planned for disposal within one year:
        1. Review the issuer's board meeting minutes, and relevant internal materials, to determine whether there are property, plant and equipment, and investment property or long-term equity investments planned for disposal within one year that meet the threshold requiring public announcement set forth in the Guidelines for Handling Acquisition and Disposal of Assets by Public Companies.

        2. Inquire with the issuer's relevant personnel and review relevant information on the names, nature, quantity (or surface area), location, date of acquisition, cost of acquisition, appreciation in reevaluation, book value, anticipated sale price, and profit or losses from disposal of the aforementioned property, plant and equipment, and investment property or long-term equity investment, so as to understand the reasons for the disposal thereof and impact on the issuer's financial condition. (Attachment 11)

      6. Obtain information on the issuer's capital raising and changes in its earnings per share for the most recent period and the most recent three fiscal years, and perform an overall analysis and assessment to determine whether the funds raised were utilized appropriately, whether reasonable benefits were realized, and the dilution effect on earnings per share.

      7. Review the issuer's representations or commitments, relevant approval letters and materials for the previous registration for cash capital increase, merger or acquisition, acquisition of shares from another company, or issuance of corporate bonds or, if the company has only been listed (or traded over-the-counter) in the past three years, those for the application for the initial public offering, and make a sample inspection of relevant documents to determine whether any of the aforementioned statements or commitments have been violated. If the company became listed (or traded over-the-counter) within the past three years, review the company's financial reports certified by the CPA to know whether within three years of becoming listed (or traded over-the-counter), there have been any instances where the company's operating revenue decreased by not less than 30 percent compared to the previous year. If so, analyze such changes by comparing them with those of companies within the same business, and determine the reasonableness of the company's measures for improvement.

      8. Inquire with the issuer's relevant managers and review the minutes of the directors' meeting, relevant contracts, verification reports of transfer prices, and other relevant materials, to ascertain whether the issuer has, in the most recent period and the most recent three fiscal years, purchased unfinished construction projects and assumed unfulfilled contracts of the seller. If yes, further determine the reason for the seller's assignment, the basis and reasonableness of the assignment price, the legality of the assignment process, the impact on the rights and obligations of the contracting parties, and whether there are any irregularities in the issuer's share prices during the assignment period. (*)

  3. Issuer's internal control and audit systems and their implementation:

    1. Obtain relevant information on the company's internal control and audit systems to determine whether the systems are comprehensive and sound and effectively implemented. (*)

    2. Review the internal control improvement recommendations for the past three fiscal years submitted by the CPA, and carry out sample inspections on any deficiencies to determine whether there are material deficiencies yet to be rectified. (Attachment 12) (*)

    3. If, upon the request of the Financial Supervisory Commission, an internal control project audit is to be carried out by the CPA: (Attachment 12)

      1. Review whether the company has carried out self-assessment in accordance with the Guidelines for Establishment of Internal Control Systems by Public Companies.

      2. Determine whether the unqualified audit opinion (I) issued by the CPA is consistent with the findings of the above tasks.

      3. Verify that the internal control review report submitted by the CPA is consistent with the following:

        1. Jointly audited and attested by not less than two CPAs.

        2. The date of coverage of the statement on internal control is consistent with the review period of the project audit.

  4. Implementation of each previous plan for cash capital increase, merger or acquisition, acquisition of shares from another company, or issuance of corporate bonds, or private placement of securities:

    1. Obtain relevant information on prior uncompleted plans for cash capital increase, merger or acquisition, acquisition of shares from another company, or issuance of corporate bonds, or private placement of securities, and make a sample inspection of the major receipt and expenditure certificates to determine whether the plans have proceeded as scheduled. If the progress is behind schedule, determine the reasonableness of the delay, the impact on shareholders' equity, and whether an improvement plan is in place.

    2. Review relevant information on each prior uncompleted plan for cash capital increase, merger or acquisition, acquisition of shares from another company, or issuance of corporate bonds, or private placement of securities to ascertain the contents of the plans, source and utilization of funds, reason for changes, and benefits before and after the changes.

    3. Review relevant information on all prior plans for cash capital increase, merger or acquisition, acquisition of shares from another company, or issuance of corporate bonds, or private placement of securities whose actual completion dates were within three years from the date of registration, so as to determine whether the original forecasted benefits have been realized. If the benefits are less than the anticipated targets, determine the reasons for such deficiency and determine the reasonableness thereof and the impact on shareholders' equity.

    4. Obtain the issuer's issuance rules for corporate bonds and its long-term borrowing agreements for the most recent period and the most recent three fiscal years, to determine whether the issuer has repaid the principal and paid the interest in a timely manner and whether there are any material restrictions on its finances, business, or other matters. (*)

    5. Refer to the Market Observation Post System to determine whether the company has fully disclosed information as required by the Directions for Public Companies Conducting Private Placements of Securities for each of its previous private placements of securities.

  5. Assess whether any of the following exists with respect to the current offering and issuance of securities:

    1. Carry out an itemized assessment based on the list in Attachment 19.

    2. Carry out an itemized assessment based on the list in Attachments 20 and 21.

    3. Compliance with acts and regulations and the effect on company operations

      1. Review the company's articles of incorporation, financial reports, and the minutes of the board of directors meeting or shareholders meeting where it was resolved to undertake the current fundraising plan, to determine whether the current plan for offering and issuance of securities complies with Article 130; Article 156, paragraph 7; Article 167, paragraphs 3 and 4; Article 246; Article 247, and Article 278 of the Company Act, and Article 28-4 of the Securities and Exchange Act, and is free of the any events specified in Articles 249, 250, 269, and 270 of the Company Act. If an investee company holds stock of the issuer, assess whether such circumstance violates the principle of reality of capital and would affect the total amount of the capital that the issuer wishes to raise with the current offering and the future execution of the plan for capital increase, and explain whether any specific countermeasures have been adopted and whether adequate written explanations and undertakings have been issued to guarantee the shareholders' equity of the issuer. If the company is applying for a cash capital increase following two consecutive years of losses, determine whether such action complies with the proviso to Article 270 of the Company Act, and analyze the soundness, reasonableness, and feasibility of the company's business plan.

      2. Obtain the issuer's annual reports, financial reports, and relevant management representation letters, make inquiries of the issuer's legal staff or other relevant personnel, and read legal opinions provided by attorneys retained by the issuer, to determine the effect on issuer's finances of any major litigation, non-litigious matter, or administrative litigation involving the issuer or any director, supervisor, general manager, major shareholder with shareholdings of 10 percent or more, or subordinate company thereof, within the most recent three fiscal years and up until the date of publication of the prospectus, and whether the countermeasures adopted to deal with it are complete and appropriate.

      3. Review the issuer's annual reports, executed contracts, and relevant management representation letters, and make inquiries of the issuer's legal staff or other relevant personnel, to identify all of the issuer's and its subsidiaries' supply/sales contracts, technical cooperation contracts, construction contracts, and other important contracts, that could affect investors' rights and interests, and are currently effective or have expired within the most recent fiscal year, and analyze their effect on the issuer's business.

      4. Obtain the issuer's annual reports, financial reports, and relevant management representation letters, and make inquiries of the issuer's legal staff or other relevant personnel, to determine whether any major management-labor disputes or environmental pollution incidents have occurred to the issuer or its subsidiaries. (*)

      5. If the funds to be raised through the current plan for offering and issuance of securities will be put to a use that requires the consent of the competent authority for a relevant industry, obtain the original letter of consent from the competent authority for the relevant industry, to determine whether any conditions attached to such approval would have any effect on the current offering and issuance of securities.

        6. If an underwriter retains a lawyer to issue a legal opinion required for an assessment under the preceding paragraph, it shall obtain a written statement issued by the lawyer to ascertain whether the lawyer is free of the circumstances listed below:
        1. The lawyer is the same person as the issuer's regular legal consultant, or as the lawyer retained by the issuer to complete its checklist of legal issues for the offering, or as the certifying CPA of the most recent financial report, or belongs to a firm with which the issuer has a substantive cooperative relationship.

        2. The lawyer was disciplined by the Attorney Discipline Committee of the Ministry of Justice within the past year.

        3. The lawyer has any of the relationships listed below with the issuer, the certifying CPA of the most recent financial report, or the lead securities underwriter:
          1. Is a related party as defined in the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry.
          2. Any other law or regulation provides for, or fact proves, direct or indirect control by one party over the other party's personnel, finances, or business operations.
      6. Obtain a written statement by the lawyer retained by the issuer to complete its fundraising case checklist and issue a legal opinion, to ascertain whether the lawyer is free of the circumstances listed in 3.5.C.e.II and III.
  6. Review the securities exchange information or OTC securities information related to the share price of the company and related information for the past one month to understand its share price variation (including variation trends, the average range of fluctuation, and comparison with the capitalization-weighted share index). (Attachment 22)

  7. Evaluate the following matters item by item, and provide an overall assessment of the feasibility, necessity, and reasonableness of the current offering and issuance of securities (the provision regarding necessity need not be applied in the case of an emerging stock company carrying out a cash capital increase through the issuance of new shares for public sale prior to an initial exchange listing or an initial OTC listing, or in the case of an OTC (or exchange) listed company applying to change to an exchange (or OTC) listing and carrying out a cash capital increase for the purpose of achieving equity ownership dispersion):

    1. Review the minutes of the company's directors' or shareholders' meeting relevant to the current plan and other relevant information, to determine the reasonableness of the current plan, its anticipated schedule, and anticipated benefits.

    2. Obtain the minutes of the issuer's directors' or shareholders' meeting relevant to the current plan and other relevant information, to analyze and compare the impact of the different sources of capital on the dilution of the earnings per share of the issuer during the current fiscal year, and determine the necessity and reasonableness of the cash capital increase. If the current capital increase is not contributed in cash, assess the reasonableness of the amount of the capital contribution and the necessity of acquiring property or consult opinions provided by financial or business experts.
      3. If the current issue is bonds denominated in CNY, it shall advise an issuer to provide a statement that "it undertakes that the CNY funds raised will only be used by overseas operating entities, and will not in any manner be used in Taiwan" and obtain the plan for the source of funds for redemption at maturity (including at least the source of funds for redemption at maturity and how the CNY funds will be obtained), in order to carefully evaluate the feasibility, necessity, and reasonableness of the fundraising plan for redemption at maturity, and how the CNY funds will be obtained.

    3. If the capital increase plan is to be used for reinvestment purposes, the following items shall be assessed:

      1. If the investment is to be made in a business requiring special approval, inquire with the company's relevant personnel and obtain the letter of approval or permission from the competent authority in charge of the business requiring special approval, and inquire whether any conditions attached to such approval or permission will affect the current offering and issuance of securities, to ascertain the feasibility of the current plan. If approval or permission has not been obtained, inquire whether the feasibility of the current capitalization increase plan will be affected.

      2. Review the minutes of the company's directors' or shareholders' meeting relevant to the current plan and other relevant information, to understand the use of the current investment plan and relevance of the business operations of the investee enterprise to the company's business, and further determine the necessity and feasibility of the investment.

      3. If the issuer holds not less than 20 percent of the common stock of the investee company, review the minutes of the company's directors' or shareholders' meeting relevant to the current plan, to understand the expected schedule for capital utilization, the capital recovery period, the anticipated annual benefits prior to capital recovery, the reasonableness of the anticipated benefits, as well as the impact on the profitability of the issuer and dilution of earnings of per share.

      4. If the business to be invested in is a major national economic development project, the underwriter shall review the minutes of the company's directors' or shareholders' meeting and information relevant to the current plan, to determine he impact on the issuer's rate of return on investment of the investee enterprise's reinvestment plan, fund raising plans, and items within such plans, over the coming five years.

      5. Inquire with the company's relevant personnel and review the relevant account books and information to determine the necessity of using the resources and technologies of the issuer, and the reasonableness of the consideration or technology licensing fees paid by the investee company.

    4. If the current capital increase plan is to be used for debt repayment or for increasing working capital, the following items shall be assessed:

      1. Review the issuer's parent company only financial report for the most recent fiscal year and statement of projected monthly cash receipts and expenditures for the fiscal year of the registration and the coming fiscal year, and determine the reasonableness of the issuer's operational features, accounts receivables collection, payment policies for accounts payable, funds expenditure plans, and the projected schedule of cash receipts and expenditures, as well as their relevance to the financial forecast. Analyze the necessity and reasonableness for the capital increase with respect to the issuer's funding needs and the timing of and reason for its shortage of funds.
        2. In the above statement of projected cash receipts, if in the future there will be major capital expenditures and long-term equity investments whose combined amount equals 60 percent or more of the current capital raising plan, the source of the funding, uses, and anticipated benefits shall be stated.
      2. Inquire with the company's relevant personnel and review the relevant account books and information to determine the necessity and reasonableness of the current capital increase plan based on its impact on financial leverage, debt ratio (or the self-provided capital and risk capital ratios), operating income, profitability, and dilution of earnings per share during the year of filing of the registration.

      3. If the current plan for capital increase is to be used to repay debts, obtain the itemized details of the company's debt repayment to determine the necessity of the original loans, their reasonableness, and tangible benefits.
        4. If the funds are borrowed to acquire land for construction or to pay construction costs, the necessity and reasonableness of the loan should be determined based on the funds expected to be spent from the time of acquisition of land to completion of the construction project, sources of extra capital, the stage-by-stage schedule for fund injection, and the construction schedule. In addition, with respect to the time and amount of the recognized loss and profit, determine the reasonableness of the expected benefits and whether they are realized.
    5. If the current capital increase plan is going to be used to acquire land for construction or to pay construction costs, the underwriter shall review the minutes of the directors' and shareholders' meetings relevant to the current plan and other relevant information, to determine the reasonableness of the expected benefits based on the total capital to be spent from the time of the acquisition of land to the completion of the construction project, sources for extra capital, the stage-by-stage schedule for fund injection and the construction schedule. In addition, with respect to the time and amount of the recognized loss and profit, determine the reasonableness of the possible benefits.

    6. Inquire with the company's relevant managers and review the minutes of the directors' and shareholders' meetings relevant to the current capital increase plan, and examine relevant contracts, acquisition price verification reports, and other related information, to determine, if the current capital increase plan is used to purchase unfinished construction and assume unfulfilled contracts of the seller, the reason for the assignment by the seller, the basis and reasonableness of the assignment price, the legality of the assignment process, and impact on the rights and obligations of the contracting parties.

    7. If the current capital increase is carried out in conjunction with a capital decrease, the following items should be assessed:

      1. Review the minutes of the directors' and shareholders' meetings and the shareholders' meeting handbook relevant to the current capital increase and decrease, as well as other relevant information, and obtain the contents of the current capital increase and decrease plans and relevant timetables for share operations, so as to ascertain whether the capital increase and decrease are being carried out in conjunction and to determine the impact on shareholders' equity, net value per share, and earnings per share, as well as the issuing price for the capital increase, and whether these matters have been disclosed in the shareholders' meeting handbook. In addition, the reasonableness and feasibility of the contents and the timetable of the current plans should also be determined.

      2. Inquire with the company's relevant personnel and review the relevant account books and materials to determine the reasons for losses, improvement plan, and the impact of the capital decrease on the financial and business situation, and shareholders' equity. If there is a plan to introduce a new management team or engage in strategic alliance with other companies, obtain the educational background and professional experience of the new management team, the new management strategy, or the strategic alliance plan, so as to understand their feasibility for improving the company's operational situation and profitability.

      3. Inquire with the company's relevant personnel and review relevant account books and materials to determine the impact on the company's net value per share and earnings per share before and after decrease/increase in capitalization.

      4. If the company's incurred losses are not due to factors related to the industry or economic climate, review the CPA's project audit report on the company's internal control system to understand whether the company has submitted improvement plans for the deficiencies listed in the report, and review relevant implementation records to ascertain the status of implementation.

    8. Obtain relevant material to assess the handling method to be adopted if a shortage of funds occurs as a result of any change in the tentative price or share [issuance] volume interval, or the reasonableness of the fund use and anticipated benefits when raising additional funds. Also assess whether the tentative share issuance volume interval complies with Article 278 of the Company Act.

  8. Obtain the financial report and relevant undertakings of the managing underwriter and the issuing company for the past year, to determine whether they are related parties. If they are related parties, determine the relationship. In addition, determine whether there are major property transactions, financing, or other transactions between the parties.

  9. Determine whether any of the material subsequent events set forth in Paragraph 2 of Article 36 of the Securities and Exchange Act has occurred to the issuer from the date the balance sheet was audited and attested (or reviewed) by a CPA until the date of printing of the prospectus, so as to assess their impact on shareholders' equity and share prices.

  10. Review the following items with respect to the rules for the issuance and subscriptions of preferred shares with warrants and of the preferred shares and warrants of preferred shares with detachable warrants after detachment of the warrants to determine their reasonableness and impact on the rights of the current shareholders and holders of preferred shares with warrants:

    1. The model used to determine the issuance price, subscription price, and the method of determining the number of shares entitled per warrant, as well as their parameters and basic assumptions, sampling data, and deduction process.

    2. Whether with respect to the ownership of dividends during the fiscal year of share subscription it is clearly stated that the shareholders can exercise their rights to claim dividends when they subscribe to the shares.

    3. Call or redemption provisions.

    4. Subscription price and subscription ratio adjustment timing and method.

    5. Restrictive covenants.

    6. Method of performing subscription rights.

    7. Method of payment for shares.

    8. Other important stipulations.

  11. If the current issue is a cash issue of new shares at below par value, the following matters shall be assessed:
    12. Obtain the directors' or shareholders' meeting minutes and relevant materials concerning the current plan, to compare the costs of obtaining funds from various different sources and assess the reasons for and reasonableness of not using other means of fund raising; assess the method of determining the issue price and its impact on shareholder equity, and ascertain whether it was submitted to and passed by the shareholders' meeting or directors' meeting pursuant to the Company Act or laws or regulations applicable to securities.

  12. Other necessary auditing procedures.

  13. Companies, who in the last year have carried out underwriting cases for initial listing (or OTC listing), or in the last year have carried out a capital increase by issuing new shares, or issued domestic convertible corporate bonds, may be exempt from the aforementioned assessment and auditing procedures marked with (*).
Article 4     Issuance of New Shares as a Result of Capital Increase due to Merger
  1. The business and financial conditions of the target company and the impact of the merger on the business and finances of the issuer:

    1. Business condition:
      2. The auditing procedures in 3.2.A and 3.2.A.j shall be applied mutatis mutandis to analyze the possible impact of the merger on the business operations of the issuer.
    2. Financial condition:

      1. Review the CPA-certified financial reports of the target company and obtain a representation letter issued by the target company to gain an understanding of any major property transactions, endorsements/guarantees, material commitments, loans of funds to others, or trading of derivative financial products engaged in by the target company and its subsidiaries with related parties or other companies (including transactions among the parent and subsidiaries) over the most recent three fiscal years to the date of issuance of the underwriter's assessment report, and perform sample checking of relevant vouchers, to analyze whether there are any irregularities and the impact on the issuer's financial condition following the merger. (Attachment 9)

      2. Obtain the details of the target company's issuance of long-term and short-term liabilities and loans for the most recent fiscal year and to the date of issuance of the underwriters' assessment report to understand whether payment of the principal and interests have been carried out on time. Review existing rules governing the issuance of existing corporate bonds and long- and short-term borrowing agreements to understand whether any significant restrictive covenants apply to the financial, business, or other operations of the target company, and to analyze the impact of the above matters on the financial condition of the issuer.

      3. Investments by the target company and its subsidiaries (including transactions among the parent and subsidiaries):

        1. Where there is a material impact on the investee company:
          1. Obtain the latest financial report and relevant information of the investee enterprise for the most recent fiscal year to understand its operational and financial condition.
          2. Review the financial reports and account books of the target company for the most recent period and the more recent three fiscal years to understand the the share of the profit/loss and dividend distributions of the subsidiaries, affiliated enterprises and joint ventures accounted for using the equity method (amount of profit remittances from investee enterprises overseas should also be listed), to understand the impact of the merger on the operations and profitability of the issuer. (Attachment 6)
          3. Obtain relevant information on the use of resources and technology provided by the target company and its subsidiaries to the investee company (including transactions among the parent and subsidiaries), as well as the price details, to analyze the reasonableness of the consideration paid or technology licensing fees.
          4. Obtain a representation letter from the target company to determine whether the investee company has experienced operational or financial difficulties until the most recent period, and analyze the impact of the merger on the issuer.
        2. Where there is controlling power over the investee company:
          3. In addition to the auditing in accordance with the procedures set forth in 4.1.B.c.I, the audit procedures set forth in 3.2.A.j.II.i shall also apply mutatis mutandis to ascertain relevant issues between the controlling party and the target company.
        3. The auditing procedures in 3.2.A.j.II.iii shall apply mutatis mutandis to the audit of the target company, to ascertain the impact of the merger on the financial condition of the issuer and whether the amount of indirect investments carried out in the Mainland Area by the issuer after the merger is consistent with applicable laws and regulations.

      4. If the target company is a construction company or has a construction division, the audit procedures in 3.1.B.d.II shall be applied mutatis mutandis to determine whether there are irregularities in the gross profit margins of the individual projects and in the forecast sales of projects that are completed but not sold.

      5. If the target company is not listed for either exchange or OTC trading:

        1. Obtain the target company's profit/loss information in the financial reports for the most recent period and the most recent three fiscal years, and compare it with that of other companies in the same business, to understand the changes therein and the advantages and disadvantages thereof. (Attachment 7)

        2. Obtain the target company's financial ratio analysis statements in the financial reports for the most recent period and the most recent three fiscal years and compare them with those of other companies in the same business, to understand the changes therein and assess the advantages and disadvantages thereof. (Attachment 8)

        3. Whether there are serious irregular transactions that have not been rectified to date with respect to the target company or its subsidiaries (including transactions among the parent and subsidiaries):
          1. Obtain relevant information for the most recent fiscal year and the year of application on major property transactions, such as purchase and sales contracts, records of actual receipts and payments, and internal decision-making processes, to determine whether such transactions violate relevant laws and regulations, and whether irregularities exist.
          2. Obtain relevant information for the most recent five fiscal years on the sale of real property to related parties or purchase of real property from related parties, such as purchase and sales contracts, records of actual receipts and payments, and internal decision-making processes, to determine whether such transactions violate relevant laws and regulations, and whether irregularities exist.
          3. Obtain relevant information on land purchased or sold and neighboring land purchased or sold by related parties during the same general time frame, to determine whether there are any obvious differences in their prices without legitimate cause.
          4. Obtain details of the operating income for the most recent five fiscal years to determine whether there is any operating income from sale of products or lease of real estate to any related party in the most recent period, where such income is not less than 20 percent of the annual operating income, without legitimate cause.
          5. Obtain relevant information on the sale of real property to non-related parties or purchase of such from non-related parties in the past five fiscal years, such as sale/purchase contracts, actual records of payments and receipts, and the internal decision-making process, so as to determine whether such real estate transactions are obviously different from other general transactions without legitimate.
          6. Obtain details of loans of funds to other parties in the last year, and inquire with the company's management to determine whether there have been any loans of funds to other persons apart from financing necessitated by inter-company business transactions.
        4. Any serious instances of financial reports not prepared in accordance with laws and regulations and general accounting principles, or failure to effectively establish and implement internal control, audit, and book accounting systems, as well major issues arising therefrom.
          1. Obtain the financial report of the target company for the most recent fiscal year certified by a CPA; review the CPA's opinion to determine whether the financial report has been prepared in accordance with laws and regulations and general accounting principles.
          2. Inquire with the company's personnel to understand whether there are issues in the financial report of the target company of which the competent authority has requested rectification in writing but that have not been rectified.
          3. Determine whether there have been any serious instances of failure to effectively establish and implement the internal control, internal audit, and book accounting systems.
  2. Determine whether any of the following conditions are present in the current issuance of new shares as a result of capital increase due to merger:

    1. Determine whether the current issuance of new shares as a result of capital increase due to merger is consistent with Articles 53-1 to 53-8 of the Operating Rules of the Taiwan Stock Exchange Corporation or Chapter II-1, Section 1 of the GreTai Securities Market Rules Governing Securities Trading on Over-the-Counter Markets:

      1. Obtain the pro-forma consolidated financial statements prepared by the CPA, together with the financial information of the surviving company and the target company not listed for either exchange or OTC trading, so as to determine whether the net worth per share of the surviving company in the most recent fiscal year is higher than the net worth per share of the existing exchange-listed (or OTC-listed) company, or meets the standard for profitability of exchange-listed (or OTC-listed) companies prescribed by a stock exchange (or OTC market).

      2. Obtain the most current roster of shareholders to determine whether the amount of the new shares issued as a result of the merger held by the directors, supervisors, and shareholders holding more than 10 percent of issued and outstanding shares of the target company, that have been placed under centralized custody is consistent with regulations; obtain letters of consent from the aforementioned individuals stating their willingness to place the new shares under centralized custody.

      3. Obtain the written reply from a stock exchange or OTC market to the company approving the merger.

      4. Obtain the financial report for the most recent fiscal year of the target company not listed for either exchange or OTC trading, to determine the kind of audit report issued therefor.

    2. Carry out an itemized assessment based on the list in Attachments 20 and 21.

    3. Compliance with acts and regulations and the effect on company operations

      1. Obtain relevant management representation letters furnished by a lawyer from the target company and its subsidiaries, make inquiries of the target company's and its subsidiaries' legal staff or other relevant personnel, and carry out the below-listed audit procedures, to determine whether the target company and its subsidiaries have been involved in any major management-labor disputes or environmental pollution incidents that would affect the company's normal financial or business operations, and have not yet been corrected:

        1. Major management-labor disputes:
          2. Obtain a representation letter or interview union officials and employees to understand whether there have been labor strikes or unresolved major labor disputes in recent years, as well as their causes and methods of resolution.
          Obtain the approval documents and charter of the employee welfare committee, and carry out a sample audit on the contributions to the employee welfare fund, to ascertain whether the company has duly contributed to the employee welfare fund in accordance with law, and has duly contributed to the employees' pension reserve fund account on a monthly basis.
          Review the relevant account books and obtain inspection records and relevant correspondence from the labor inspection office to determine whether, in the past three fiscal years, there has been any major occupational disasters due to deficient safety or sanitation facilities, or any disposition of partial or complete work suspensions due to violations of the Labor Safety and Health Act, or whether hazardous machinery or equipment have been installed that have not passed inspection, where no application for re-inspection has been filed with the inspection agency.
          Ascertain whether there are outstanding premiums or late payment penalties to the National Labor Insurance program, and whether such payments have not been settled despite legal recourse.
        2. Major environmental pollution issues:
          3. Obtain an itemized list of the pollution prevention equipment, and inquire with the company's personnel about the installation and operations of the equipment and the emissions permit, to ascertain whether permits have been obtained for the installation, operations, and emission standards of the pollution prevention equipment in accordance with relevant regulations.
          Obtain the official disposition letter(s) setting out any penalties received from the environmental protection authorities in the most recent two fiscal years and during the year of application, to determine whether the company has incurred any successive daily penalties from the environmental protection authorities. If it has, determine whether the company has commissioned an inspection institution approved by the environmental protection authorities to carry out inspection and testing, and has forwarded the test result reports, and filed on the basis thereof a pollution rectification completion report with the environmental protection authorities. The matter shall be deemed rectified if the company has not, within three months from filing of the completion report, incurred further penalties.
          Inquire with the management of the target company and its subsidiaries to ascertain whether there have been cases of disputes related to public hazards where the company did not have equipment to effectively prevent such hazards, or was unable to maintain normal operations of the equipment and provide records of regular maintenance of the equipment.
          Review the correspondence with the competent authority to determine whether any order has been issued by a relevant agency for suspension of work or suspension or termination of business operations, or any pollution-related license has been revoked due to issues of environmental pollution.
          Obtain correspondence with the environmental protection agency and inquire whether there has been reckless disposal of waste materials or failure to store, clean, or dispose of waste materials in accordance with relevant regulations, or there has been serious environmental pollution resulting in death, serious injury, or harm to human health and resultant illnesses during the treatment process.
          Review the correspondence with the environmental protection authorities to determine whether there is an enterprise announced by the central competent authority through public notice as a controlled location or a site under remediation due to soil or groundwater pollution.
          Obtain correspondence with the environmental protection authorities and a lawyers' opinion to determine whether any responsible person has been sentenced by a final and unappealable court judgment of manufacture, processing, or import of any prohibited environmental agent.
      2. Obtain a legal opinion issued by a lawyer in accordance with the audit procedures specified below and a written statement by the target company, and make inquiries of the target company's legal staff, to determine whether the target company is or has been involved in any major management-labor disputes or environmental pollution incidents that would affect the company's normal financial or business operations, and that have not yet been corrected:

        1. For the target company:
          2. Obtain a representation letter from the target company or inquire with the bills clearing house as to whether the company has been blacklisted in the past three fiscal years or has any record of dishonor of negotiable instruments due to insufficient funds, where such record has not yet been expunged.
          Obtain a representation letter from the target company and contracts for short-term and long-term borrowing agreements, and carry out sample audit of such loans and their re-payment status, to determine whether the company has had any delinquent loan payments over the past three fiscal years.
          Obtain a representation letter from the target company or take into reference lawyers' opinions or inquire in writing with the relevant agencies to determine whether the target company has within the past three years:
          Violated the Labor Standards Act and been sentenced pursuant to a final and unappealable criminal judgment (provided, however, that this restriction does not apply where the company has been re-inspected by the inspection agency within the past two years and found to have rectified the issue);
          Violated the Tax Assessment Act and been found guilty pursuant to a final and unappealable criminal judgment;
          Engaged in other serious fraudulent or unlawful conduct, or any other conduct that resulted in loss of company credit, thus impairing the company's interests, shareholders' equity, or the public interest.
        2. For the directors, supervisors, general manager, or de facto responsible person:
          3. Obtain a representation letter or inquire with the bills clearing house whether the company's directors, supervisors, general manager, or de facto responsible person have been blacklisted in the past three fiscal years, or have any record of dishonor of negotiable instruments due to insufficient funds, where such records have not been expunged.
          Obtain a representation letter from each of the company's directors, supervisors, general manager, or de facto responsible person, or take into reference lawyers' opinions to determine whether such persons engaged in any of the following during the past three fiscal years:
          Obtained loans from financial institutions and had delinquent loan payments;
          Violated the Labor Standards Act and been sentenced by a final and unappealable criminal judgment;
          Violated the Tax Collection Act and been convicted by a final and unappealable judgment;
          Committed offenses of corruption, malfeasance of office, fraud, violation of trust, or misappropriation, and been sentenced by a court of law to a punishment of imprisonment or greater severity;
          Operated any other company involved in inappropriate conduct such as fraudulent insolvency;
          Any other conduct in grave violation of law or regulation or the principle of good faith.
      3. Review the company's articles of incorporation, financial reports, the minutes of the board of directors meeting and shareholders meeting where the particulars of the current merger were resolved upon, and the merger agreement, to determine whether the current plan for offering and issuance of securities complies with Article 278, Article 316, Article 317-1, and the proviso to subparagraph 1 Article 270, of the Company Act, and whether the current issuance of new shares as a result of capital increase due to merger complies with the provisions of the Fair Trade Act. If the company is applying for a cash capital increase following two consecutive years of losses, analyze the soundness, reasonableness, and feasibility of the company's submitted business plan.
      4. Obtain the target company's annual reports, financial reports, and relevant management representation letters, and make inquiries of the target company's legal staff or other relevant personnel, to determine the effect on company finances of any major litigation, non-litigious matter, or administrative litigation involving the target company or any director, supervisor, major shareholder with shareholdings of 10 percent or more, responsible person, general manager, de facto responsible person, or subordinate company thereof, within the most recent three fiscal years and up until the date of publication of the prospectus. Also analyze how the merger would affect the financial condition of the issuer.

      5. Review the target company's and its subsidiaries' annual reports, executed contracts, and relevant management representation letters, and make inquiries of the target company's legal staff or other relevant personnel, to identify all of the target company's and its subsidiaries' supply/sales contracts, technical cooperation contracts, construction contracts, and other important contracts, that could affect investors' rights and interests, and are currently effective or have expired within the most recent fiscal year, and analyze their effect on the issuer's business.

      6. If the target company requires the consent of the competent authority for a relevant industry, obtain the original letter of consent from the competent authority for the relevant industry, to determine whether any conditions attached to such approval would have any effect on the current offering and issuance of securities.

        7. If an underwriter retains a lawyer to issue a legal opinion required for an assessment under the preceding paragraph, it shall obtain a written statement issued by the lawyer to ascertain whether the lawyer is free of the circumstances listed below:
        1. The lawyer is the same person as the issuer's regular legal consultant, or as the lawyer retained by the issuer to complete its checklist of legal issues for the merger, or as the certifying CPA of the most recent financial report, or belongs to a firm with which the issuer has a substantive cooperative relationship.

        2. The lawyer was disciplined by the Attorney Discipline Committee of the Ministry of Justice within the past year.

        3. The lawyer has a relationship listed below with the issuer, the target company, the certifying CPA of the issuer's most recent financial report, the independent expert that issued the opinion on the fairness of the share exchange ratio, or the lead securities underwriter:
          1. A related party as defined under the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry.
          2. Any other law or regulation provides for, or fact proves, direct or indirect control by one party over the other party's personnel, finances, or business operations.

      7. Obtain a written statement by the lawyer retained by the issuer to complete its case review form and issue a legal opinion, to ascertain whether the lawyer is free of the circumstances listed in4.2.C.f.I or II.
  3. Determine the reasonableness of the current issuance of new shares as a result of capital increase due to merger and the impact of the merger on the issuer:

    1. Obtain the minutes of the directors' meetings and the shareholders' meetings of both companies, as well as the contents of the public notices, to analyze the reasonableness of the process.
      2. Interview the management and decision-makers of both companies and obtain information on their internal assessment of the merger to analyze the reasonableness of the merger objectives and the reasonableness and feasibility of the merger plan.
    2. (deleted)

    3. Obtain the method of determining the share-swap ratio, the basis of its calculation, comments from financial experts, and the CPA's verification and opinion on the share-swap ratio, and analyze the reasonableness of the share-swap ratio.

    4. Obtain the company's plan for the integration of its financial, business, personnel, and information operations after the merger, and analyze the feasibility and reasonableness thereof.

    5. Interview the R&D, technical, production, sales, and administrative personnel of both companies, and taking into account the projected development plan, analyze the impact on the issuer's finances, business, and shareholders' equity over the three years after the merger, and its expected benefits and reasonableness.

  4. Other necessary auditing procedures.
Article 4-1     Issuance of New Shares Due to Acquisition of Shares of Another Company
  1. The business and financial conditions of the company whose shares are to be acquired and the impact of the acquisition of the shares of that company and issuance of new shares on the business and finances of the issuer:

    1. Business condition:
      2. The auditing procedures in 3.2.A.i and 3.2.A.j shall be applied mutatis mutandis to analyze the possible impact of the acquisition of the shares of the other company and issuance of new shares on the business operations of the issuer.
    2. Financial condition
      1. Review the CPA-certified financial reports of the company whose shares are to be acquired and obtain a representation letter by that company to gain an understanding of any major property transactions, endorsements/guarantees, material commitments, loans of funds to others, or the trading of derivative financial products engaged in by that company and its subsidiaries with related parties or other companies (including transactions among between the parent and subsidiaries) over the most recent period and the most recent three fiscal years to the date of issuance of the underwriter's assessment report, and perform sample checking of relevant vouchers, to analyze whether there are any irregularities and the impact on the issuer's financial condition following the acquisition of the shares of the company and issuance of new shares.

      2. The auditing procedures in 4.1.B.b shall be applied mutatis mutandis to analyze the impact of the issuance of new shares due to acquisition of shares of another company on the finances of the issuer.

      3. The auditing procedures in 4.1.B.c shall be applied mutatis mutandis to analyze the impact of the issuance of new shares due to acquisition of shares of another company on the finances of the issuer.

      4. The auditing procedures in 4.1.B.d shall be applied mutatis mutandis to analyze the impact of the issuance of new shares due to acquisition of shares of another company on the finances of the issuer.

  2. Assess whether any of the following circumstances exists with respect to the current issuance of new shares due to acquisition of another company's shares:

    1. Conduct an itemized assessment of the matters enumerated in Attachment 20 and Attachment 21.

    2. Compliance with acts and regulations and effects on company operations

      1. Review the company's articles of incorporation, financial reports, and the minutes of the board of directors meeting where the current plan to acquire the shares of another company was resolved upon, to determine whether the current plan for offering and issuance of securities complies with Article 156, paragraph 8, Article 278, paragraph 1, and the proviso to subparagraph 1 of Article 270 of the Company Act. If it is applying for a cash capital increase following two consecutive years of losses, analyze the soundness, reasonableness, and feasibility of its business plan.

      2. Obtain annual reports, financial reports, and relevant management representation letters issued by the company whose shares are to be acquired, and make inquiries of that company's legal staff or other relevant personnel, to determine whether that company or any current director, supervisor, major shareholder with shareholdings of 10 percent or more, responsible person, general manager, de facto responsible person, or subordinate company thereof is involved in any pending major litigation, non-litigious matter, or administrative litigation from the most recent three fosca; years up to the date of publication, and analyze the effects thereof on the financial condition of the issuer following the acquisition of the shares of the company and issuance of new shares.

      3. Obtain annual reports, financial reports, and relevant management representation letters issued by the company whose shares are to be acquired and its subsidiaries, and make inquiries of that company's and its subsidiaries' legal staff, to identify all of that company's supply/sales contracts, technical cooperation contracts, construction contracts, and other important contracts, that could affect investors' rights and interests, and are currently effective or have expired within the most recent year, and analyze their effect on the business of the issuer following the acquisition of the shares of the company and issuance of new shares.

      4. If the company whose shares are to be acquired must be approved by a competent authority in a relevant industry, obtain a the original letter of consent from the competent authority for the relevant industry, to determine whether any conditions attached to such approval would have any effect on the current offering and issuance of securities.

        5. If an underwriter retains a lawyer to issue a legal opinion required for an assessment under the preceding paragraph, it shall obtain a written statement issued by the lawyer to ascertain whether the lawyer is free of the circumstances listed below exist:
        1. The lawyer is the same person as the issuer's regular legal consultant, or as the lawyer retained by the issuer to complete its acquisition case checklist for the offering, or as the certifying CPA of the most recent financial report, or belongs to a firm with which the issuer has a substantive cooperative relationship.

        2. The lawyer was disciplined by the Attorney Discipline Committee of the Ministry of Justice within the past year.

        3. The lawyer has a relationship listed below with the issuer, the company whose shares are acquired, the certifying CPA of the most recent financial report of the issuer, the independent expert that issued the opinion on the fairness of the share exchange ratio, or the lead securities underwriter:
          1. Is a related party as defined under the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry.
          2. Where any other law or regulation provides for, or fact proves, direct or indirect control by one party over the other party's personnel, finances, or business operations.

      5. Obtain a written statement by the lawyer retained by the issuer to complete its case review form and issue a legal opinion, to ascertain whether the lawyer is free of the circumstances listed in 4-1.2.B.d.II or III.
  3. The reasonableness of the current issuance of new shares due to acquisition of shares of another company and the impact on the issuer:

    1. Obtain the minutes of the directors' meetings of both companies, as well as the contents of the public notices, to analyze the reasonableness of the process.
      2. Interview the management and decision-makers of both companies and obtain information on their internal assessment of the issuance of new shares due to acquisition of another company's shares, to analyze the reasonableness of the objectives of acquiring the other company's shares and the feasibility and necessity of the plan to issue new shares due to acquisition of the other company's shares.
      Based on the relevant public notices and applications submitted by both companies to the relevant agencies, analyze the reasonableness of the projected progress timetable.
    2. Obtain the method of determining the share-swap ratio, the basis of its calculation, comments from financial experts, and the CPA's verification and opinion on the share-swap ratio, and analyze the reasonableness of the share-swap ratio.

    3. Interview the R&D, technical, production, sales, and administrative personnel of both companies, and taking into account the projected development plan, analyze the impact on the issuer's finances, business, and shareholders' equity over the three years after the issuance of new shares due to acquisition of shares of another company, and its expected benefits and reasonableness.

  4. Other necessary auditing procedures.
Article 4-2     The below-listed matters shall be specified or assessed in the event of issuance of new shares due to an acquisition or demerger duly conducted in accordance with law:
  1. The business and financial conditions of the acquired company (or acquired business or property) or demerged division and the impact of the acquisition or demerger on the business and finances of the issuer:

    1. Business condition:
      2. The auditing procedures in3.2.A.i and 3.2.A.j shall be applied mutatis mutandis to analyze the possible impact of the acquisition or demerger on the business operations of the issuer.
    2. Financial condition:
      1. Review the CPA-certified financial reports of the acquired company or the demerged division and obtain a representation letter by the acquired company or the demerged division to gain an understanding of any major property transactions, endorsements/guarantees, material commitments, loans of funds to others, or trading of derivative financial products engaged in by the acquired company or demerged division and any subsidiaries thereof with related parties or other companies over the most recent period and the most recent three fiscal years, and perform sample checking of relevant vouchers, to analyze whether there are any irregularities and the impact on the issuer's financial condition following the acquisition or demerger.

      2. The auditing procedures in 4.1.B.b shall be applied mutatis mutandis to analyze the impact of the acquisition or demerger on the finances of the issuer.

      3. The auditing procedures in 4.1.B.c shall be applied mutatis mutandis to analyze the impact of the acquisition or demerger on the finances of the issuer.

      4. The auditing procedures in 4.1.B.d shall be applied mutatis mutandis to analyze the impact of the acquisition or demerger on the finances of the issuer.

  2. Assess whether any of the following circumstances exists with respect to the current acquisition or demerger duly conducted in accordance with laws and regulations:

    1. Whether the current acquisition or demerger duly conducted in accordance with laws and regulations is consistent with 53-9 to 53-18 or 53-19 to 53-29 of the Operating Rules of the Taiwan Stock Exchange Corporation and Chapter II-1, Sections 2, 3, or 4 of the GreTai Securities Market Rules Governing Securities Trading on Over-the-Counter Markets, and obtain the opinions provided in the response letter from the Stock Exchange or Over-the-Counter Securities Exchange approving the acquisition or demerger and issue of new shares in accordance with laws and regulations.

    2. Conduct an itemized assessment of the matters enumerated in Attachment 20 and Attachment 21.

    3. Compliance with acts and regulations and the effect on company operations

      1. Obtain the company's financial reports, minutes of the board of directors meeting and shareholders meeting where it was resolved to undertake the issuance of new shares due to acquisition or demerger, and related contracts and plan documents, to determine whether the current capital increase due to either acquisition or demerger-and-transfer complies with Articles 8, 28, 29, 31, 35 and 38 of the Business Mergers and Acquisitions Act, Article 278, paragraph 1, of the Company Act, and the provisions of the Fair Trade Act.

      2. Obtain annual reports and relevant management representation letters issued by the acquired company or the demerged division (the company), and make inquiries of that company or division's legal staff or other relevant personnel, to determine whether any current director, supervisor, major shareholder with shareholdings of 10 percent or more, responsible person, general manager, de facto responsible person, or subordinate company thereof is involved in any pending major litigation, non-litigious matter, or administrative litigation from the most recent three years up to the date of publication, and analyze the effects thereof on the financial condition of the issuer following the acquisition or demerger.

      3. Review annual reports, executed contracts, and relevant management representation letters of the acquired company or the demerged division (the company) and its subsidiaries, and make inquiries of that company or division's legal staff, to identify all of that company's or division's and its subsidiaries' supply/sales contracts, technical cooperation contracts, construction contracts, and other important contracts, that could affect investors' rights and interests, and are currently effective or have expired within the most recent fiscal year, and analyze their effect on the business of the issuer following the acquisition or demerger.

      4. If the acquired company or demerged division must be approved by a competent authority in a relevant industry, obtain a the original letter of consent from the competent authority for the relevant industry, to determine whether any conditions attached to such approval would have any effect on the current offering and issuance of securities.

        5. If an underwriter retains a lawyer to issue a legal opinion required for an assessment under the preceding paragraph, it shall obtain a written statement issued by the lawyer to ascertain whether the lawyer is free of the circumstances listed below:
        1. The lawyer is the same person as the issuer's regular legal consultant, or as the lawyer retained by the issuer to complete its checklist of legal issues for the acquisition or demerger case, or as the certifying CPA of the most recent financial report, or belongs to a firm with which the issuer has a substantive cooperative relationship.

        2. The lawyer was disciplined by the Attorney Discipline Committee of the Ministry of Justice within the past year.

        3. The lawyer has a relationship listed below with the issuer, the acquisition target, the certifying CPA of the most recent financial report of the issuer, the independent expert that issued the opinion on the fairness of the share exchange price, or the lead securities underwriter:
          1. A related party as defined under the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry.
          2. Where any other law or regulation provides for, or fact proves, direct or indirect control by one party over the other party's personnel, finances, or business operations.
      5. Obtain a written statement by the lawyer retained by the issuer to complete its case review form and issue a legal opinion, to ascertain that the lawyer is free of the circumstances listed in 4-2.2.C.d.II or III .
  3. The reasonableness of the current acquisition or demerger and issuance of new shares and the impact of the acquisition or demerger on the issuer:

    1. Obtain the minutes of the directors' and shareholders' meetings of both companies, as well as the contents of the public notices, to analyze the reasonableness of the process.
      2. Interview the management and decision-makers of both companies and obtain information on their internal assessment of the acquisition or demerger plan, to analyze the reasonableness of the objectives of the acquisition or demerger plan and the feasibility and necessity of the acquisition or demerger plan.
      Based on the relevant public notices and applications submitted by both companies to the relevant agencies, analyze the reasonableness of the projected progress timetable.

    2. Explain the appraised value of the business and assets of the acquired company or demerged division, and any matters related to assumption by the issuer of rights or obligations of the acquired company or demerged division, and assess the reasonableness thereof.

    3. Obtain the price appraisal method and findings for any business or assets used as the price of acquisition; the method and basis of calculation of the share-swap ratio; the total volume and types and volumes of shares acquired by the demerged company or its shareholders; comments from financial experts, and the CPA's verification and opinion on the share-swap ratio, and analyze the reasonableness thereof.

    4. Obtain the company's plan for the integration of its financial, business, personnel, and information operations after the acquisition or demerger, and analyze the feasibility and reasonableness thereof.

    5. Interview the R&D, technical, production, sales, and administrative personnel of both companies, and taking into account the projected development plan, analyze the impact on the issuer's finances, business, and shareholders' equity over the coming three years after the acquisition or demerger, and the expected benefits and reasonableness thereof.

  4. If it is a case of acquisition of business or property and the pro-forma financial report has not been obtained, specify the reason and the other alternative audit procedures adopted, and collect other sufficiently probative supporting materials (such as financial information) to conduct necessary auditing.

  5. Other necessary auditing procedures.
Article 5     Issuance of Convertible Corporate Bonds
    In addition to checking for compliance with these Procedures, the audit shall cover the following:
  1. Verify the following for the current issue of convertible corporate bonds:

    1. Review the authorized capital, paid-in capital, and types of convertible shares as specified in the articles of incorporation.

    2. Review the minutes of the directors' meeting as well as relevant resolutions on the offering and issuance of convertible corporate bonds.

    3. Obtain a legal opinion by a lawyer, based on the issuer's financial reports for the most recent period and the most recent three fiscal years audited and attested (or reviewed) by a CPA, presenting itemized calculations and stating whether there are violations of applicable provisions of Articles 249 or 250 of the Company Act or Article 28-4 of the Securities and Exchange Act.

    4. Review and assess the reasonableness of the handling method to be adopted if insufficient funds are raised because of less than full issuance when the issuance of convertible corporate bonds is registered by the ceiling method.

  2. Review the total issue amount of the current issue of convertible corporate bonds and the number of shares anticipated to be converted in full, and the terms of issuance and exchange of the current issue of convertible corporate bonds, to ensure compliance with the relevant provisions of the Self-regulatory Rules Governing the Provision of Advisory Services by Underwriter Members to Issuing Companies Offering and Issuing Securities, as promulgated by the Taiwan Securities Association.

  3. Review the following items under the regulations governing the offering and issuance of convertible corporate bonds to assess their reasonability and impact on the equity of the current shareholders and holders of the convertible corporate bonds:

    1. The method through which the issuance price and the conversion price are determined, as well as the parameters and basic assumptions, sampling data, and deduction process.

    2. Whether the rate of yield of the current convertible corporate bond and the right of sellback take into reference the rates of the financial institutions, issuance cost of other companies within the same business, and prospects for the company's operations, profitability, and credit rating.

    3. Whether with respect to entitlement to interest and dividends during the year of conversion it is clearly stated that the creditors can exercise their rights to conversion and claim dividends.

    4. Call or redemption provisions.

    5. Timing and method for conversion price adjustments.

    6. Restrictive covenants.

    7. Method for performance of conversion obligations (issuance of new shares or delivery of issued shares).

    8. Sellback rights of bondholders.

    9. Other important stipulations.

  4. Analyze the different factors in the calculation of the price of convertible corporate bonds (face value interest rate, years of issuance, conversion price, conversion period, re-setting of conversion price, right of sell back, redemption right of the company, factors included in the discount such as liquidity discount and credit risk, standard difference of the annual rate of return of share prices, reference share price for calculating the warrants, and other factors in the determination of the issuance price) to provide calculation data and evaluate their reasonableness:

    1. Establish a model to determine the price of the convertible corporate bonds, and determine the different rights included in the model's terms of issuance.

    2. Collect the data required to calculate the different rights, including the daily closing share price of the underlying of the convertible corporate bonds in the last year, daily yield of central government bonds during the duration of the corporate bonds, terms of issuing convertible corporate bonds adopted by companies in the same business, and one-year time deposit interest rate of financial institutions.

    3. Calculate the value of the different rights and assess the reasonableness of such rights.

  5. The auditing procedures in Point 3.6 shall apply mutatis mutandis to the current issue of convertible corporate bonds to analyze its impact on the determination of the conversion price.

  6. Impact of the issuer's dividend policy on the offerees of the convertible corporate bonds:

    1. Based on the minutes of the shareholders' meeting over the most recent period and the most recent three fiscal years and the issuer's articles of incorporation, review the issuer's share dividend policy and inquire with the issuer's relevant personnel to understand whether the share dividend plan in the coming year is consistent with the relevant provisions of the Self-regulatory Rules Governing the Provision of Advisory Services by Underwriter Members to Issuing Companies Offering and Issuing Securities, as promulgated by the Taiwan Securities Association.

    2. Obtain the regulations governing the issuance of convertible corporate bonds and the conversion method to determine whether anti-dilution provisions are in place.

  7. Impact on shareholders' equity after the issuance of the convertible corporate bonds:

    1. Analyze the impact on the financial burden of the issuer based on the issuance of the convertible corporate bonds, conversion period, face value interest rate, and yield-to-call.

    2. Calculate the maximum dilution of shareholder equity and the impact on net value per share after the issuance of the convertible corporate bonds.

  8. Other necessary auditing procedures.
Article 6     Issuance of Bonds with Warrants
    The auditing procedures in III and V shall apply mutatis mutandis to the offering and issuance of bonds with warrants bonds with detachable warrants.
Article 7      (Deleted)
Article 8      (Deleted)
Article 9     Establishment by Public Offering
  1. Obtain relevant information on the preparatory stages of the company to understand the reasons for the establishment by public offering, the members of the promoters, distribution of share equity, amount of shares subscribed by related parties, and whether the qualifications of the promoters are consistent with laws and regulations.

  2. Inquire with the company's relevant personnel and obtain relevant information to understand the relevant laws and regulations formulated by the competent authority in charge of its business activities and other important regulations.

  3. Apply, mutatis mutandis, the audit procedures in 3.1.A and3.1.B.a.

  4. Obtain the issuer's business operations plan to determine its reasonableness and feasibility:

    1. Inquire with the company's relevant personnel to ascertain the method by which the business operations plan is formulated, the process, source of information, and references.

    2. Inquire with the company's relevant personnel to understand the main products or scope of business activities.

    3. Inquire with the company's relevant personnel and obtain relevant information on the management philosophy and direction, and compare such information with other companies within the business to determine the company's risks, growth potential, and feasibility.

    4. Inquire with the company's relevant personnel and obtain information on long-term and short-term business development plans, major target markets, and competition strategies, and compile domestic and international industry reports and relevant information on major competitors, to analyze the feasibility of the plans.

    5. Implementation Plan

      1. Inquire with the company's relevant personnel and carry out on-site inspection to understand the factors considered in selecting the business location and manufacturing plant site; obtain an inspection report from a professional agency to determine the method by which the transaction price is determined and its reasonableness.

      2. Inquire with the company's relevant personnel and obtain relevant personnel information on the company's major managerial staff over the past years to determine whether the educational backgrounds of the major managerial staff are consistent with regulations.

      3. Inquire with the company's relevant personnel and obtain relevant information on the functions, job descriptions, and responsibilities of the various company divisions to determine their reasonableness and whether operational efficiency can be increased.

      4. Inquire with the company's relevant personnel, interview union officials or employees, and obtain relevant information on the company's human resources, and salary and welfare structure over the past year, so as to understand its manpower requirements, recruitment methods, development, training, promotion, performance review, and remuneration regimes, and employee benefits, and determine their reasonableness.

      5. Obtain relevant information on financial planning and capital use to determine its reasonableness.

      6. Obtain relevant information on internal control and the internal audit system formulated in accordance with the regulations of the competent authority to determine whether the audit system is effectively enforced.

    6. Review the financial reports certified by a CPA and obtain a written statement by the issuer to gain an understanding of any major property transactions, endorsements/guarantees, material commitments, loans of funds to others, or derivatives trading engaged in by the promoters or subsidiaries with related parties or other companies (including transactions among the parent and subsidiaries) over the past year, and perform sample checking of relevant vouchers, to analyze whether there are any irregularities. (Attachment 9)

    7. The auditing procedures in 3.8 shall apply mutatis mutandis to the current establishment by public offering.

    8. Other important issues.

  5. Other necessary auditing procedures.
Article 10     Public Offer to Unspecified Persons by the Securities Holder
  1. Apply, mutatis mutandis, the audit procedures in 3.1.A and3.1.B.a.

  2. The issuer's business and financial condition and financial forecast:

    1. Business condition: (Deleted)

    2. Financial condition:

      1. The auditing procedures in 3.2.B.a shall apply mutatis mutandis to the current public offering.

      2. The auditing procedures in 3.2.B.b shall apply mutatis mutandis to the current public offering.

      3. Obtain legal opinions from lawyers and relevant management representation letters, and inquire with the issuer's legal personnel, to understand whether there have been any major litigation, non-litigation, or administrative litigation cases involving the issuer, its directors or supervisors, president, or major shareholders holding not less than 10 percent of shares, over the most recent three fiscal years to the date of publication.
        4. In addition, review the financial reports certified by the CPA and obtain representation letters from the company or legal opinions from lawyers to understand whether the company has experienced financial difficulties over the past three fiscal years.
      4. The auditing procedures in 3.2.B.d shall apply mutatis mutandis to the current public offering.

      5. Deleted

  3. Determine the reasonableness and feasibility of the current public offering:

    1. Obtain the current market price reference information of the securities and the information on the equity attributable to owners of the parent in the issuer's most recent financial reports certified by a CPA to determine the reasonableness of the method of price determination.

    2. Inquire with the holder of the securities as to its objective and considerations in the current public offering to determine their reasonableness.

    3. Obtain the most recent (annual) financial reports and related materials of the issuer to determine whether the current public offering is consistent with the provisions of Article 63 of the Regulations Governing the Offering and Issuance of Securities by Securities Issuers. (Attachment 23)

    4. The auditing procedures in 3.6 shall apply mutatis mutandis to the current public offering.

    5. Deleted

    6. Obtain the securities transaction details of the holder of the securities for the most recent three fiscal years and to the date of issuance of the underwriters' assessment report to determine the presence of irregularities.

    7. Analyze the impact of the current public offering on the securities market and the issuer's share prices.

  4. Obtain the relevant undertakings by the securities holder and issuer and review the company's financial reports and internal materials certified by a CPA to determine whether the parties are related. If the parties are related, determine their relationships.
    5. The auditing procedures in 3.2.B.d shall apply mutatis mutandis to understand the issues relevant to the two parties.
  5. The auditing procedures in 3.8 shall apply mutatis mutandis to the current public offering.

  6. Ascertain whether any subsequent material event set forth in Article 36, paragraph 3, subparagraph 2 of the Securities and Exchange Act has occurred with respect to the issuer during the time period from the balance sheet date of its financial report from the most recent period audited and attested (or reviewed) by CPAs up to the date of publication of the prospectus, and if so, evaluate its impact on shareholder equity or the price of the securities.

  7. Other necessary auditing procedures.
Article 11      If there is any significant subsequent event on the date of publication of the prospectus, also ascertain all matters related to these Assessment and Auditing procedures, and update the explanation and assessment.
Article 12     These Assessment and Audit Procedures, and any amendments hereto, shall be implemented after passage by the board of directors of the Taiwan Securities Association and submission to and recordation by the Financial Supervisory Commission. Any additions, deletions, or amendments to the attachments to the Assessment and Audit Procedures shall be implemented after ratification by the board of directors of the Taiwan Securities Association.
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