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To unify the assessment work of securities underwriters in securities offering and issuance cases and enhance the functions of underwriters, these Assessment and Auditing Procedures are hereby adopted in accordance with Letter No. (89)-Taiwan-Finance-Securities-(I)-00972 of the Securities and Futures Commission (SFC), Ministry of Finance of 12 April 2000. |
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Except in underwriting cases for public offerings of beneficiary certificates by trustee institutions and public offerings of asset-based securities by special purpose companies, underwriters guiding issuers in the offering and issuance of securities shall abide by the provisions of these Auditing Procedures. |
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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.
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 Standards for Financial Accounting Gazette No. 3, Criteria Governing Audit Working Papers, shall apply mutatis mutandis to the creation of such files.
The term “over-the-counter (OTC) company” as used in these Audit 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 ROC Over-the-Counter Securities Exchange (ROSE) Criteria Governing Review of Securities Traded on Over-the-Counter Markets or Article 3 of the ROSE Criteria Governing Review of Class II Stocks Traded on Over-the-Counter Markets of the ROC Over-the-Counter Securities Exchange. |
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Capital Increase by Issuing New Shares (Including Preferred Shares with Warrants)
1. The market situation and prospects for future development of the business the issuer is in:
(1) Collect relevant industry reports and information to understand the status quo of the industry; collect and analyze relevant information on up-, mid-, and down-stream industries.
(2) Collect information including the name of the major competitors for the business items that have generated not less than 30 percent of the company's revenue in the most recent fiscal year, and their approximate market shares and competitive niches, to analyze the company’s competitiveness. (*)
(3) Collect foreign and domestic reports on the business the issuer is in, to analyze future growth potential, development trends, and future market supply and demand of the business.
2. The business and financial condition of the issuer and its financial forecast:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the company’s supply of major raw materials, main products, or major sales areas, and analyze the company’s potential for future growth.
(ii) Business scope:
(a) Inquire with the company’s relevant personnel and obtain information on the company’s major scope of business operations, current products and their applications, or the scope of services, and its long and short-term business development plans.
(b) Collect information on the evolution of the company’s R&D department, its organization, personnel and their education and professional experience, technical expertise, research results, annual R&D investments over the past five fiscal years, and future plans, to understand the major source of the company’s technical know-how, amount of technology licensing fees or royalties and the method of payment thereof, and direction of future R&D work. (*)
(c) Review the basic information on all suppliers and customers that accounted for 10 percent or more of the company's total purchases or sales in any one of the past three fiscal years, together with purchase and sale contracts, to analyze the reasons for any major customer changes by business, product, customer, region, or sales channel, and to ascertain whether the company’s business is stable and whether there is a risk of over-concentration. 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 and 2)
(d) Obtain the company’s internal information and gather relevant industry reports to analyze, by department or product type, whether there have been any irregular changes in production and sales volume, operating income, and gross operating profit in the past three years and projected for the coming year. (Attachments 3, 4, and 5)
If the fluctuations in gross profit over the past three fiscal years are not less than 20 percent, the impact of changes in prices and sales volume on the gross profit shall be analyzed.
(e) Review the company’s supplier and sales contracts, technical cooperation contracts, construction contracts, and other major contracts that will impact shareholders’ equity and which are valid and exiting or which expired within the past year, to analyze their impact on the company’s business. (Attachment 6)
(f) Review the company’s financial reports, internal materials, and legal opinions over the past three fiscal years to the date of issuance of the underwriter’s assessment report, to ascertain the reasonableness of the company’s business transactions with its affiliated enterprises, and whether there have been irregular transactions. If the issuer sells products to its affiliated enterprise, relevant information shall be obtained on the issuer’s credit policy, transaction terms, payment collection, and subsequent use of the products for production or re-sale by the affiliated enterprises 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.
(g) Review the company’s and its affiliated enterprises’ financial reports and information on their major business or major products, sales channels, and sales revenue over the past three fiscal years to the date of issuance of the underwriter’s assessment report, to ascertain whether the company 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.
(iii) Personnel and equipment use:
(a) Obtain information on the total number of employees, departed employees, retirement rules, number of employees dismissed with pay or retired, number of direct and indirect workers, their average ages and average number of years of service in the company, to understand changes in turn-over rate and analyze the reasonableness thereof. (Attachment 7) (*)
(b) Obtain a lawyer’s legal opinion to ascertain whether any labor disputes or labor agreements exist. (*)
(c) Increase or decrease in fixed assets and management thereof: (*)
Collect information on increases or decreases in the company’s fixed assets over the past three fiscal years.
Collect information on relevant assets management rules of the issuer to understand its management of fixed assets.
(d) Inventory and funds management:
Inventory management:
Review the financial reports of the past three fiscal years certified by a certified public accountant (CPA) to ascertain whether there is idle, obsolete, or expired inventory, or inventory obviously lower in value than its replacement cost. In addition, obtain the amounts of inventory and profit/loss thereupon in the past three fiscal years and inquire with relevant personnel to understand the major causes of any significant inventory surpluses or profit/loss on inventory and determine whether irregularities exist.
Obtain insurance contracts and compare with those of other companies in the same business to determine whether the rate of insurance coverage is appropriate. (*)
Funds management:
Review the financial statements and account books of the past three fiscal years to assess whether there is any violation of Article 15 of the Company Act.
Obtain relevant information on authority to approve fund allocation, the decision makers, and their positions.
(e) Current status of manufacturing plants, their use, and facility production capacity utilization rate: (Attachments 8 and 9)
Ascertain the status of use of each production plant and state the current usage status of each plant.
Obtain relevant information on the production facilities’ utilization rate for the past three fiscal years.
(f) Pollution and public hazard prevention (*)
Obtain relevant company information on fines in the past three fiscal years (date, reason for fine, amount) to understand improvement measures taken or whether there are improvement plans in place.
Obtain a legal opinion from a lawyer to understand the company’s pollution and public hazard prevention measures.
(2) Financial condition:
(i) Obtain the company’s profit and loss information for the past five fiscal years and its forecast for the coming year, and analyze the reasons for variations therein. (Attachments 10 and 11)
(ii) Compile an analysis of the company’s financial structure for the past five fiscal years and compare with that of other companies in the same business to understand changes therein and assess the advantages and disadvantages thereof. (Attachment 12)
(iii) Obtain legal opinions and relevant statements from lawyers and inquire with the company’s legal personnel to understand major litigation, non-litigation, and administrative litigation cases involving the company or the company’s directors, supervisors, general manager, shareholders holding not less than 10 percent of shares, and subordinate companies in the past three fiscal years to the date of publication, as well as the impact of such cases on the company’s financial condition and whether response measures have been comprehensive and appropriate.
(iv) Review the financial reports certified by a CPA and obtain company statements or legal opinions from lawyers to determine whether the company has experienced financial difficulties in the past three fiscal years and the impact on the company’s financial condition. (*)
(v) Review relevant information for the past three fiscal years to the date of issuance of the underwriter’s assessment report on the acquisition and disposal of shares of the parent company by subsidiaries thereof and creation of pledges on such shares owned by subsidiaries, to determine the subsidiaries’ source of capital and whether the pledges are reasonable, as well as the impact on the operations and financial condition of the parent company, and whether there are irregularities when compared with the capitalization-weighted average share price index and the share price fluctuations of businesses within the same industry during the same period. (Attachment 13)
(vi) Obtain information on the company’s endorsements/guarantees, major commitments, loans of funds to others, and trading of derivatives in the past three fiscal years to analyze their impact on the company’s financial condition. (*)
(vii) Obtain the company’s regulations governing the issuance of corporate bonds and long-term loan agreements in the past three fiscal years to determine whether there are material restrictions on the company’s ability to re-pay the principal and interest on time, and on the company’s financial, business, or other operations. (*)
(viii) Investments:
(a) Where there is a material impact on the invested company:
Obtain financial statements and relevant information of the invested 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 issuing company.
Understand the amount the issuing company recognized as investment profit/loss and its dividend distributions (the amount of profit remittances from invested enterprises overseas should be listed). (Attachment 14)
Obtain the issuing company’s financial statements and account books for the past 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 issuing company’s resources and technologies by the invested company on which there is a material impact to determine the reasonableness of the consideration or technology licensing fees paid by the invested company.
(b) Where there is controlling power over the invested company:
The auditing procedures in III-2-(2)-(viii)-(a) shall apply mutatis mutandis to the current capital increase plan.
Review the issuing company’s financial statements for the most recent fiscal year and relevant information on product purchase and sale, credit policies, transaction terms, and payment settlement between the company and the invested company to determine their reasonableness and the presence of any irregularities. (Attachment 14-1)
(c) Where there is existing or planned indirect investment in mainland China: (*)
Audit the company’s investments in the mainland China area and, where any of the below circumstances exist, determine whether the company has counted it toward its maximum quota of mainland investment, applied for approval from the Investment Commission of the Ministry of Economic Affairs, and duly disclosed its relevant mainland investments:
Any circumstances in Article 4 of the Regulations Governing Permission for Investment and Technical Cooperation in the Mainland Area applies to the company.
The issuing company has obtained shareholding in a company in a third region that has [investment in] a mainland enterprise accounted for under the equity method, and the issuing company moreover is a director or supervisor of the company in the third region or exercises de facto controlling influence over the operations of the company in the third region.
A company in a third region has initially invested in a mainland enterprise using its own funds or a bank loan or equipment and machinery, and then, because the third-region company experiences a shortage of operating funds or, for purposes of repaying the debt, the issuing company raises funds for a capital infusion to the [third-region company], and the issuing company moreover is a director or supervisor of the company in the third region or exercises de facto controlling influence over the operations of the company in the third region.
The issuing company raises funds to invest in a company in a third region and moreover is a director or supervisor of the company in the third region or exercises de facto controlling influence over the operations of the company in the third region, and at the time of investment there was no investment in any mainland-area enterprise but subsequently the third-region company utilizes the funds from the capital infusion to invest in a mainland-area enterprise.
The issuing 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.
The issuing company raises funds to purchase machinery and equipment and subsequently transfers such machinery and equipment to the mainland and provides it for use by a mainland enterprise in processing of customers’ materials, and such machinery is moreover used as the price of investment in the mainland processing plant by the [issuing company], which also participates in its operation.
Calculation of the maximum quota for mainland investment:
Foreign currency conversions with respect to the mainland investment amount shall be based upon the cash foreign exchange buy rate quoted by the Central Bank at the time of the filing to the Investment Commission.
Net value shall be calculated on the basis of the financial statements for the most recent period audited and certified by a CPA
Review the minutes of the directors’ and shareholders’ meetings, the approved dates and amounts of investment passed by the Investment Commission under the Ministry of Economic Affairs, and the amounts invested to date, to understand any indirect investments carried out in mainland China by the company and the amount it recognized as investment profit/loss and amount of profit remitted back in the past three fiscal years, and to determine their impact on the financial condition of the issuing company. (Attachment 15)
(ix) Review the company’s financial reports certified by a CPA and other internal materials over the past three fiscal years to the date of issuance of the underwriter’s assessment report, to understand material property transactions, loans, endorsements/guarantees, or other transactions between the company and its subsidiaries and affiliates, and make a sample inspection of relevant certificates to determine the presence of irregularities. (Attachment 16)
(x) Real property or long-term investments planned for disposal within one year:
(a) Review the company’s financial forecast reviewed by a CPA, minutes of the directors’ meeting, and relevant internal materials, to determine whether there are real property or long-term 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.
(b) Inquire with the company’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 real property or long-term investment, so as to understand the reasons for the disposal thereof and impact on the company’s financial condition. (Attachment 17)
(xi) Based on the ratio of currency exchange profit/losses to operating profit, import/export ratio, and ratio of domestic to foreign purchases in the past three fiscal years, ascertain the company’s method of response to foreign exchange fluctuations, its actual response measures taken, and analyze the impact of foreign exchange fluctuations on the company’s profitability. (*)
(xii) If the company is a construction company or owns a construction department, obtain a report on the prices of local (neighboring) real estate, information on competitor companies within the same business, or real estate prices ratios provided by government agencies (such as the ratio of the assessed current value to the announced value, or the ratio of building construction cost to land price), and analyze the company’s financial reports for the fiscal year the company filed its report (application) and the fiscal year prior, as well as relevant information on the forecasted contribution of each individual construction project to the operating revenue and gross profit, so as 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. (Attachments 18 and 19) (*)
(xiii) Review the company’s statement or commitments, relevant approval letters and materials for the previous report (application) for the issuance and offering of securities 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.
(xiv) Inquire with the company’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 company has, in the past 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) Financial forecast and plan for the distribution of dividends:
(i) Obtain the company’s financial forecast and financial statements for the past three fiscal years and analyze the financial forecast attainment status, original forecast figures (including the dates of successive revisions and number of and reasons for such revisions), and reasons for any discrepancies in the actual attainment of the forecasts, and the reasonableness thereof. (Attachment 20)
(ii) Obtain the company’s most recent financial forecast reviewed by a CPA, and determine its reasonableness with respect to the basic assumptions contained therein; collect basic information on the industry the company is in, company’s production plan, and status of customer orders, to assess the company’s loss or profit performance.
(iii) Review the information relevant to the distribution of dividends and financial statements in the minutes of the directors’ and shareholders’ meetings in the past three fiscal years, as well as the articles of incorporation, and determine whether the company’s distribution of dividends and bonus is consistent with the relevant provisions of the Company Act and articles of incorporation, so as to assess the company’s dividend distribution policy and plan for the coming year, as well as the feasibility of its attainment. (Attachments 21 and 22)
(iv) Obtain information on the company’s capital raising and changes in earnings per share for the past five fiscal years to carry out a general analysis to determine whether the raised capital has been used appropriately, whether reasonable benefits have been realized, and the impact on the dilution of earning of per share.
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 23) (*)
(3) If, upon the request of the Financial Supervisory Commission, Executive Yuan, an internal control project audit is to be carried out by the CPA: (Attachment 23)
(i) Review whether the company has carried out self-assessment in accordance with the Guidelines for Establishment of Internal Control Systems by Public Companies.
(ii) Determine whether the unqualified audit opinion (I) issued by the CPA is consistent with the findings of the above tasks.
(iii) Verify that the internal control review report submitted by the CPA is consistent with the following:
(a) Jointly audited and certified by not less than two CPAs.
(b) The date of coverage of the internal control statement is consistent with the review period of the project audit.
4. Transfer of the issuer’s share equity:
(1) Obtain a consolidated report of share equity transfers by directors, supervisors, and shareholders holding not less than 10 percent of shares in the past three fiscal years, verify its accurateness, and ascertain the reasons for such transfers and the reasonableness of the method by which the transfer price was determined.
(2) Determine whether such transfers are consistent with the Rules and Review Procedures for Director and Supervisor Share Ownership Ratios at Public Companies.
5. Review the corporate bonds (including overseas corporate bonds), preferred shares, global depositary receipts, and overseas stock currently issued and outstanding, or are planned to be issued within the coming year by resolution of the directors’ or shareholders’ meeting, the terms and status of issuance, as well as information on the market prices of convertible corporate bonds, the market prices of corporate bonds with warrants, and the exchange of exchangeable corporate bonds, to ascertain the impact of their terms of issuance on the rights of the subscribers to the current issue. (Attachments 24, 25, 26, 27, 28, and 29)
6. Implementation of each previous plan for cash capital increase, issuance of corporate bonds, or private placement of stock or corporate bonds:
(1) Obtain relevant information on prior uncompleted plans for cash injection, issuance of corporate bonds, or private placement of stock or corporate bonds, 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 material changes 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 whose actual completion dates were within three years from the date of filing (or application), 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.
7. Assess whether any of the following exists with respect to the current offering and issuance of securities:
(1) Review the articles of incorporation, most recent financial reports, and the minutes of the shareholders’ meeting that passed the resolution for the capital increase plan, to determine whether the current cash capital increase plan is consistent with Article 156, Paragraph 2, and Article 278 of the Company Act.
(2) If the current issue is of preferred shares, review the company’s financial reports over the past three fiscal years and the records of dividend distribution for issued preferred shares, to determine whether the current capital increase is consistent with Article 269 of the Company Act.
(3) Review the company’s financial reports for the past two fiscal years to determine whether there have been losses for two successive years. If the company is applying for capital increase following losses in two successive years, determine whether such action is consistent with the proviso of Article 270 of the Company Act, and analyze the soundness, reasonableness, and feasibility of the company’s business operations plan.
(4) If the use of the capital obtained from such capital increase requires approval from the competent authority in charge of the target industry, a letter of approval from such competent authority shall be obtained to ascertain whether conditions attached to its approval would affect the current offering and issuance of shares for capital increase.
(5) Carry out an itemized assessment based on the list in Attachment 30.
(6) Carry out an itemized assessment based on the list in Attachments 31 and 32.
(7) (deleted)
(8) Review the company’s most recent financial report and shareholder roster to determine the amount of shareholding in the company by investee companies in which the issuer directly or indirectly holds more than 50 percent of the shares, and whether it violates Article 167, Paragraph 3, Subparagraph 4 of the Company Act. If the investee company holds stock in the issuer, assess whether it violates the bona fide capital principle and influences the amount of funds the issuer currently wishes to raise and the future implementation of the capital increase plan, and explain whether concrete countermeasures have been adopted and whether appropriate explanations and undertakings have been issued to safeguard the shareholders’ equity of the issuer.
(9) Review whether the circumstance exists that the amount (or amount forecasted to be) distributed per share in bonus shares for the current fiscal year is NT$2 or more and the forecasted per-share earnings before tax according to the financial forecast for the current fiscal year (calculated by the weighted average for issued and outstanding shares) compared to the earnings per share of the preceding fiscal year (calculated by the weighted average for issued and outstanding shares for that fiscal year) falls to 30 percent, and there is a material dilution of earnings per share to the extent of affecting shareholder equity. Provided, this restriction shall not apply where the purpose of the offering is to raise funds for domestic investment to expand production facilities or purchase fixed assets, and the company can provide specific materials evidencing that the decline in earnings per share is a short-term phenomenon.
8. Review the securities exchange information or OTC securities information related to the share price of the company and related information for the past three months to understand its share price variation (including variation trends, the average range of fluctuation, and comparison with the capitalization-weighted share index). (Attachment 33)
9. Evaluate the following matters item by item, and assess comprehensively the feasibility, necessity, and reasonableness of the current offering and issuance of securities:
(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 company’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 the coming 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 capital increase plan is to be used for reinvestment purposes, the following items shall be assessed:
(i) 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.
(ii) 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 invested enterprise to the company’s business, and further determine the necessity and feasibility of the investment.
(iii) If the issuer holds not less than 20 percent of the common stock of the invested 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.
(iv) If the invested business 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 invested enterprise’s reinvestment plan, fund raising plans, and items within such plans, over the coming five years.
(v) 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 invested 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:
(i) Review the company’s financial report for the most recent fiscal year and statement of projected monthly cash receipts and expenditures and financial forecasts for the fiscal year of the report (application) and the coming fiscal year, and determine the reasonableness of the company’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.
(ii) 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 report (application) and in the coming fiscal year.
(iii) 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.
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:
(i) 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.
(ii) 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.
(iii) 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.
(iv) 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.
10. 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.
11. Determine whether any of the material subsequent events set forth in Paragraph 2 of Article 36 of the Securities and Exchange Act has occurred from the date the balance sheet was audited and certified (or reviewed) by a CPA until the presentation of the securities underwriter’s assessment report, so as to assess their impact on shareholders’ equity and share prices.
12. Review the following items with respect to the rules for the issuance and subscriptions of preferred shares with 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 provisions.
(6) Method of performing subscription rights.
(7) Method of payment for shares.
(8) Other important stipulations.
12-1. If the current issue is a cash issue of new shares at below par value, the following matters shall be assessed:
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.
13. Other necessary auditing procedures.
14. 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 (*).Capital Increase by Issuing New Shares (Including Preferred Shares with Warrants)
1. The market situation and prospects for future development of the business the issuer is in:
(1) Collect relevant industry reports and information to understand the status quo of the industry; collect and analyze relevant information on up-, mid-, and down-stream industries.
(2) Collect information including the name of the major competitors for the business items that have generated not less than 30 percent of the company's revenue in the most recent fiscal year, and their approximate market shares and competitive niches, to analyze the company’s competitiveness. (*)
(3) Collect foreign and domestic reports on the business the issuer is in, to analyze future growth potential, development trends, and future market supply and demand of the business.
2. The business and financial condition of the issuer and its financial forecast:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the company’s supply of major raw materials, main products, or major sales areas, and analyze the company’s potential for future growth.
(ii) Business scope:
(a) Inquire with the company’s relevant personnel and obtain information on the company’s major scope of business operations, current products and their applications, or the scope of services, and its long and short-term business development plans.
(b) Collect information on the evolution of the company’s R&D department, its organization, personnel and their education and professional experience, technical expertise, research results, annual R&D investments over the past five fiscal years, and future plans, to understand the major source of the company’s technical know-how, amount of technology licensing fees or royalties and the method of payment thereof, and direction of future R&D work. (*)
(c) Review the basic information on all suppliers and customers that accounted for 10 percent or more of the company's total purchases or sales in any one of the past three fiscal years, together with purchase and sale contracts, to analyze the reasons for any major customer changes by business, product, customer, region, or sales channel, and to ascertain whether the company’s business is stable and whether there is a risk of over-concentration. 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 and 2)
(d) Obtain the company’s internal information and gather relevant industry reports to analyze, by department or product type, whether there have been any irregular changes in production and sales volume, operating income, and gross operating profit in the past three years and projected for the coming year. (Attachments 3, 4, and 5)
If the fluctuations in gross profit over the past three fiscal years are not less than 20 percent, the impact of changes in prices and sales volume on the gross profit shall be analyzed.
(e) Review the company’s supplier and sales contracts, technical cooperation contracts, construction contracts, and other major contracts that will impact shareholders’ equity and which are valid and exiting or which expired within the past year, to analyze their impact on the company’s business. (Attachment 6)
(f) Review the company’s financial reports, internal materials, and legal opinions over the past three fiscal years to the date of issuance of the underwriter’s assessment report, to ascertain the reasonableness of the company’s business transactions with its affiliated enterprises, and whether there have been irregular transactions. If the issuer sells products to its affiliated enterprise, relevant information shall be obtained on the issuer’s credit policy, transaction terms, payment collection, and subsequent use of the products for production or re-sale by the affiliated enterprises shall be obtained, to determine the reasonableness thereof. In the event that such tra |
| 4 |
Issuance of New Shares as a Result of Merger
1. The business and financial conditions of the merged company and the impact of the merger on the business and finances of the issuer:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the supply condition of major raw materials of the merged company, its main products, and major sales areas, and assess its potential for future growth.
(ii) Business scope:
(a) (deleted)
(b) Obtain information on the products or services currently provided by the merged company, and inquire with the company’s relevant personnel to understand the main applications or functions of such products or services.
(c) The auditing procedures in III-2-(1)-(ii)-(e) shall be applied mutatis mutandis to analyze the possible impact of the merger on the business operations of the issuer.
(d) Obtain the details of business transactions between the merged company and its affiliated enterprises in the past three fiscal years to the date of issuance of the underwriter’s assessment report, and determine whether there have been any irregular transactions. If yes, ascertain the status of correction and the impact of the merger on the business operations of the issuer.
(e) Analyze the possible impacts of the business transactions between the merged company and its former affiliates on the issuer after the merger.
(2) Financial condition:
(i) Obtain a statement from the merged company and an attorney letter to determine whether the company and its affiliated enterprises are currently engaged in major litigation, non-litigation, case or administrative litigation cases, and analyze the impact of the merger on the financial condition of the issuer.
(ii) Obtain the relevant information on the merged company’s major property transactions, endorsements/guarantees, major commitments, and loans of funds to other parties, or relevant details of other transactions as of the date of issuance of the underwriter’s assessment report, to determine the presence of irregularities and the impact of the merger on the financial situation of the issuer. (Attachment 16)
(iii) Obtain the details of the merged 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 loan contracts to understand whether they impose restrictions on the financial, business, or other operations of the merged company, and to analyze the impact of the above matters on the financial condition of the issuer.
(iv) Investments:
(a) Where there is a material impact on the invested company:
Obtain the latest financial report and relevant information of the invested enterprise for the most recent fiscal year to understand its operational and financial condition.
Review the financial reports and account books of the merged company for the past three fiscal years to understand the amount it recognized as investment profit/loss and its dividend distributions (amount of profit remittances from invested enterprises overseas should also be listed), to understand the impact of the merger on the operations and profitability of the issuer. (Attachment 14)
Obtain relevant information on the use of resources and technology provided by the merged company to the invested company, as well as the price details, to analyze the reasonableness of the consideration paid or technology licensing fees.
Obtain a statement from the company to determine whether the company has experienced operational or financial difficulties until the most recent quarter, and analyze the impact of the merger on the issuer.
(b) Where there is controlling power over the invested company:
In addition to the auditing in accordance with the procedures set forth in IV-1-(2)-(iv)-(a), the audit procedures set forth in III-2-(2)-(viii)-(b) shall also apply mutatis mutandis to ascertain relevant issues between the controlling party and the merged company.
(c) The auditing procedures in III-2-(2)-(viii)-(c) shall apply mutatis mutandis to the audit of the merged company, to ascertain the impact of the merger on the financial condition of the issuer and whether the amount of indirect investments carried out on mainland China by the issuer after the merger is consistent with applicable laws and regulations.
(v) If the merged company is a construction company or has a construction department, the audit procedures in III-2-(2) 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.
(vi) If the merged company is an unlisted or non-OTC company:
(a) Obtain the company’s profit/loss information for the past three fiscal years and the forecasted information for the coming year to analyze the reasons for changes therein. (Attachment 10 and 11)
(b) Prepare an analysis of the company’s financial structure for the past three fiscal years and compare the figures with those of the other companies within the same business, to understand fluctuations in the figures and the company’s advantages and disadvantages. (Attachment 12)
(c) Obtain legal opinions and relevant statements from lawyers and inquire with the company’s legal personnel to determine whether any circumstances enumerated in Subparagraphs 1, 2, or 3 of Paragraph 1 of Article 156 of the Securities and Exchange Act exist.
(d) Determine whether there are material labor disputes or environment pollution issues that are sufficient to affect the company’s normal business operations, and have not been rectified to date:
Major labor disputes:
Obtain a statement from the merged company or interview union officials and employees to understand whether the company has experienced labor strikes or unresolved major labor disputes, as well as their causes and methods of resolution.
Obtain the approval documents and charter of the employee welfare committee of the merged company, and carry out a sample audit on the merged company’s 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 funds 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 have been major occupational injuries due to deficient safety or sanitation facilities, or safety and health issues, or any disposition of partial or complete work suspensions due to violations of the Worker Safety and Health Act, or whether hazardous machinery or equipment have been installed that have not passed inspection, and where no application for re-inspection has been filed with the inspection agency.
Ascertain whether the company owes outstanding premiums or late payment penalties to the National Labor Insurance program, and whether such payments have not been settled despite legal recourse.
Major environmental pollution issues:
Obtain an itemized list of the pollution prevention equipment of the merged company, 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 laws and regulations.
Obtain the official disposition letter of any penalties the merged company received from the environmental protection agency in the past two fiscal years and during the year of application, to determine whether the company has incurred successive daily penalties from the environmental protection agency. If yes, determine whether the company has commissioned an inspection institution approved by the environmental protection agency to carry out inspection and testing, and has forwarded the test result reports, and filed on the basis thereof a pollution improvement completion report with the environmental protection agency. Such 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 administrative authorities for the merged company 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 the company, due to issues of environmental pollution, has been ordered by any relevant agency to suspend work or suspend or terminate business operations, or had any pollution-related license revoked.
Obtain correspondence with the environmental protection agency and inquire whether the company has disposed of waste materials recklessly or has failed to store, clean, or dispose of waste materials in accordance with relevant regulations, or has caused serious pollution resulting in death, serious injury, or illnesses during the handling process.
Review the correspondence with the environmental protection agency to determine whether the company is an enterprise announced by the central competent authority through public notice as a restricted location or a site under remediation due to soil or underground water pollution.
Obtain correspondence with the environmental protection agency and a lawyers’ opinion to determine whether the company’s responsible person has been sentenced by a final and unappealable court judgment of manufacture, processing, or import of prohibited environmental drugs.
(e) Whether there are serious irregular transactions that have not been rectified to date:
Obtain relevant information of the merged company 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.
Obtain relevant information of the merged company for the past 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.
Obtain relevant information on land purchased or sold by the merged company and neighboring land purchased or sold by related parties during the same general time frame, to determine whether there are any obvious difference in their prices without legitimate cause.
Obtain details of the operating income of the merged company for the past 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 last quarter, where such income is not less than 20 percent of the annual operating income, without legitimate cause.
Obtain relevant information on the sale of real property to non-related parties or purchase of such from non-related parties by the merged company 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.
Obtain details of loans of funds by the merged company 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.
(f) Whether there has been any act of breach of faith by the company or its current directors, supervisors, general manager, or actual responsible person over the past three fiscal years:
For the issuing company:
Obtain a statement from the merged 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 records have not been cancelled.
Obtain a statement from the merged company and contracts for short-term and long-term loans, 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 statement from the merged company or take into reference lawyers’ opinions or inquire in writing with the relevant agencies to determine whether the merged company has within the past three years:
violated the Labor Standards Act and has been sentenced by 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 convicted by a final and unappealable criminal judgment;
engaged in other serious false or unlawful conduct, or any other conduct that resulted in loss of company credit, thus impairing the company’s interests, shareholders’ equity, or public interests.
For the directors, supervisors, general manager, or actual responsible person:
Obtain a statement or inquire with the bills clearing house whether the company’s directors, supervisors, general manager, or actual 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 cancelled.
Obtain a statement from each of the company’s directors, supervisors, general manager, or actual responsible person, or take into reference lawyers’ opinions to understand 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 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 not less than imprisonment;
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.
(g) Any serious instances of financial statements 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.
Obtain the financial report of the merged 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.
Inquire with the company’s personnel to understand whether there are issues in the financial report of the merged company of which the competent authority has requested rectification in writing but that have not been rectified.
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) Review the articles of incorporation, the most recent financial report, and the minutes of the shareholders’ meeting containing the resolution to carry out the current merger, to determine whether the current merger and capital increase is consistent with Article 278 of the Company Act.
(2) Obtain a copy of the minutes of the shareholders’ meeting to determine whether the current merger and capital increase is consistent with Article 316 of the Company Act.
(3) Obtain a copy of the company’s merger agreement and the minutes of the shareholders’ meeting to determine whether the current merger and capital increase are consistent with Article 317-1 of the Company Act.
(4) Review the company’s financial reports of the past two fiscal years to determine whether the company has suffered losses for the past two years and thus applied for capital increase. If the company has applied for capital increase following losses in two successive years, determine whether such action is consistent with the proviso of Subparagraph 1 of Article 270 of the CompanyAct.
(5) Determine whether the current issuance of new shares as a result of capital increase due to merger is consistent with Article 51 of the Operating Rules of the Taiwan Stock Exchange Corporation or Article 16 of the R.O.C. Over-the-Counter Securities Exchange Rules Governing Securities Trading on Over-the-Counter Markets:
(i) Obtain the pro-forma consolidated financial statement prepared by the CPA, together with the financial information of the surviving company and the merged unlisted company or non-OTC company, 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 original listed (or OTC) company, or meets the standard for profitability of listed (or OTC) companies prescribed by the Stock Exchange (or the OTC Securities Exchange).
(ii) 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 merged 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.
(iii) Obtain the written reply from the TSEC and OTC Exchange to the company approving the merger.
(iv) Obtain the financial report of the merged unlisted company or non-OTC company during the most recent fiscal year to determine the kind of audit report issued therefor.
(6) Obtain a legal opinion from a lawyer to determine whether the current issue of new shares as a result of capital increase due to merger is consistent with provisions of the Fair Trade Act.
(7) Carry out an itemized assessment based on the list in Attachment 30.
(8) Carry out an itemized assessment based on the lists in Attachments 31 and 32.
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.
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)
Based on the relevant public notices and applications submitted by both companies to the relevant agencies, analyze the reasonableness of the projected progress timetable.
(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.Issuance of New Shares as a Result of Merger
1. The business and financial conditions of the merged company and the impact of the merger on the business and finances of the issuer:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the supply condition of major raw materials of the merged company, its main products, and major sales areas, and assess its potential for future growth.
(ii) Business scope:
(a) (deleted)
(b) Obtain information on the products or services currently provided by the merged company, and inquire with the company’s relevant personnel to understand the main applications or functions of such products or services.
(c) The auditing procedures in III-2-(1)-(ii)-(e) shall be applied mutatis mutandis to analyze the possible impact of the merger on the business operations of the issuer.
(d) Obtain the details of business transactions between the merged company and its affiliated enterprises in the past three fiscal years to the date of issuance of the underwriter’s assessment report, and determine whether there have been any irregular transactions. If yes, ascertain the status of correction and the impact of the merger on the business operations of the issuer.
(e) Analyze the possible impacts of the business transactions between the merged company and its former affiliates on the issuer after the merger.
(2) Financial condition:
(i) Obtain a statement from the merged company and an attorney letter to determine whether the company and its affiliated enterprises are currently engaged in major litigation, non-litigation, case or administrative litigation cases, and analyze the impact of the merger on the financial condition of the issuer.
(ii) Obtain the relevant information on the merged company’s major property transactions, endorsements/guarantees, major commitments, and loans of funds to other parties, or relevant details of other transactions as of the date of issuance of the underwriter’s assessment report, to determine the presence of irregularities and the impact of the merger on the financial situation of the issuer. (Attachment 16)
(iii) Obtain the details of the merged 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 loan contracts to understand whether they impose restrictions on the financial, business, or other operations of the merged company, and to analyze the impact of the above matters on the financial condition of the issuer.
(iv) Investments:
(a) Where there is a material impact on the invested company:
Obtain the latest financial report and relevant information of the invested enterprise for the most recent fiscal year to understand its operational and financial condition.
Review the financial reports and account books of the merged company for the past three fiscal years to understand the amount it recognized as investment profit/loss and its dividend distributions (amount of profit remittances from invested enterprises overseas should also be listed), to understand the impact of the merger on the operations and profitability of the issuer. (Attachment 14)
Obtain relevant information on the use of resources and technology provided by the merged company to the invested company, as well as the price details, to analyze the reasonableness of the consideration paid or technology licensing fees.
Obtain a statement from the company to determine whether the company has experienced operational or financial difficulties until the most recent quarter, and analyze the impact of the merger on the issuer.
(b) Where there is controlling power over the invested company:
In addition to the auditing in accordance with the procedures set forth in IV-1-(2)-(iv)-(a), the audit procedures set forth in III-2-(2 |
| 4-1 |
Issuance of New Shares Due to Acquisition of Shares of Another Company
1. The business and financial conditions of the acquired company and the impact of the issuance of new shares resulting from acquisition of shares of another company on the business and finances of the issuer:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the supply condition of major raw materials of the acquired company, its main products, and major sales areas, and assess its potential for future growth.
(ii) Business scope:
(a) Obtain information on the products or services currently provided by the acquired company, and inquire with the company’s relevant personnel to understand the main applications or functions of such products or services.
(b) The auditing procedures in III-2-(1)-(ii)-(e) shall be applied mutatis mutandis to analyze the possible impact of the issuance of new shares due to acquisition of shares of another company on the business operations of the issuer.
(c) Obtain the details of business transactions between the acquired company and its original affiliated enterprise companies in the past three fiscal years to the date of issuance of the underwriter’s assessment report, and determine whether there have been any irregular transactions. If yes, ascertain the status of correction and the impact of the issuance of new shares due to acquisition of shares of another company on the business operations of the issuer.
(d) Analyze the possible impacts of the business transactions between the acquired company and its former affiliates on the issuer after the issuance of new shares due to acquisition of shares of the other company.
(2) Financial condition:
(i) Obtain a statement from the acquired company and an attorney letter to determine whether the company and its affiliated enterprises are currently engaged in major litigation, non-litigation, case or administrative litigation cases, and analyze the impact of the issuance of new shares due to acquisition of shares of the other company on the financial condition of the issuer.
(ii) Obtain the relevant information on the acquired company’s major property transactions, endorsements/guarantees, major commitments, and loans of funds to other parties, or relevant details of other transactions as of the date of issuance of the underwriter’s assessment report, to determine the presence of irregularities and the impact of the issuance of new shares due to acquisition of shares of another company on the financial condition of the issuer.
(iii) The auditing procedures in IV-1-(2)-(iii) 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.
(iv) The auditing procedures in IV-1-(2)-(iv) 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.
(v) The auditing procedures in IV-1-(2)-(v) 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) Review the minutes of the directors’ meeting that passed the resolution for issuance of new shares due to acquisition of shares of another person, to determine whether the plan is consistent with Paragraph 6 of Article 156 of the Company Act.
(2) Obtain the articles of incorporation to determine whether the current issuance of new shares due to acquisition of shares of another person is consistent with Paragraph 1 of Article 278 of the Company Act.
(3) Review the company’s financial reports for the most recent two fiscal years, to determine there have been losses for two successive years. If the company is applying for capital increase following losses in two successive years, determine whether such action is consistent with the proviso of Subparagraph 1 of Article 270 of the Company Act.
(4) Conduct an itemized assessment of the matters enumerated in Attachment 31 and Attachment 32.
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.
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.Issuance of New Shares Due to Acquisition of Shares of Another Company
1. The business and financial conditions of the acquired company and the impact of the issuance of new shares resulting from acquisition of shares of another company on the business and finances of the issuer:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the supply condition of major raw materials of the acquired company, its main products, and major sales areas, and assess its potential for future growth.
(ii) Business scope:
(a) Obtain information on the products or services currently provided by the acquired company, and inquire with the company’s relevant personnel to understand the main applications or functions of such products or services.
(b) The auditing procedures in III-2-(1)-(ii)-(e) shall be applied mutatis mutandis to analyze the possible impact of the issuance of new shares due to acquisition of shares of another company on the business operations of the issuer.
(c) Obtain the details of business transactions between the acquired company and its original affiliated enterprise companies in the past three fiscal years to the date of issuance of the underwriter’s assessment report, and determine whether there have been any irregular transactions. If yes, ascertain the status of correction and the impact of the issuance of new shares due to acquisition of shares of another company on the business operations of the issuer.
(d) Analyze the possible impacts of the business transactions between the acquired company and its former affiliates on the issuer after the issuance of new shares due to acquisition of shares of the other company.
(2) Financial condition:
(i) Obtain a statement from the acquired company and an attorney letter to determine whether the company and its affiliated enterprises are currently engaged in major litigation, non-litigation, case or administrative litigation cases, and analyze the impact of the issuance of new shares due to acquisition of shares of the other company on the financial condition of the issuer.
(ii) Obtain the relevant information on the acquired company’s major property transactions, endorsements/guarantees, major commitments, and loans of funds to other parties, or relevant details of other transactions as of the date of issuance of the underwriter’s assessment report, to determine the presence of irregularities and the impact of the issuance of new shares due to acquisition of shares of another company on the financial condition of the issuer.
(iii) The auditing procedures in IV-1-(2)-(iii) 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.
(iv) The auditing procedures in IV-1-(2)-(iv) 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.
(v) The auditing procedures in IV-1-(2)-(v) 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) Review the minutes of the directors’ meeting that passed the resolution for issuance of new shares due to acquisition of shares of another person, to determine whether the plan is consistent with Paragraph 6 of Article 156 of the Company Act.
(2) Obtain the articles of incorporation to determine whether the current issuance of new shares due to acquisition of shares of another person is consistent with Paragraph 1 of Article 278 of the Company Act.
(3) Review the company’s financial reports for the most recent two fiscal years, to determine there have been losses for two successive years. If the company is applying for capital increase following losses in two successive years, determine whe |
| 4-2 |
Issuance of New Shares Due to Acquisition or Split
1. The business and financial conditions of the acquired company or split division and the impact of the acquisition or split on the business and finances of the issuer:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the supply condition of major raw materials of the acquired company or split division, its main products, and major sales areas, and assess its potential for future growth.
(ii) Business scope:
(a) Obtain information on the products or services currently provided by the acquired company or split division, and inquire with the company’s relevant personnel to understand the main applications or functions of such products or services.
(b) The auditing procedures in III-2-(1)-(ii)-(e) shall be applied mutatis mutandis to analyze the possible impact of the acquisition or split on the business operations of the issuer.
(c) Obtain the details of business transactions between the acquired company or split division and its original affiliated enterprise companies in the past three fiscal years to the date of issuance of the underwriter’s assessment report, and determine whether there have been any irregular transactions. If yes, ascertain the status of correction and the impact of the acquisition or split on the business operations of the issuer.
(d) Analyze the possible impacts of the business transactions between the acquired company or split division and former affiliates thereof on the issuer after the acquisition or split.
(2) Financial condition:
(i) Obtain a statement from the acquired company or the split division and an attorney letter to determine whether the acquired company or split division and affiliated enterprises thereof are currently engaged in major litigation, non-litigation, case or administrative litigation cases, and analyze the impact of the acquisition or split on the financial condition of the issuer.
(ii) Obtain the relevant information on the acquired company’s major property transactions, endorsements/guarantees, major commitments, and loans of funds to other parties, or relevant details of other transactions as of the date of issuance of the underwriter’s assessment report, to determine the presence of irregularities and the impact of the acquisition or split on the financial condition of the issuer.
(iii) The auditing procedures in IV-1-(2)-(iii) shall be applied mutatis mutandis to analyze the impact of the acquisition or split on the finances of the issuer.
(iv) The auditing procedures in IV-1-(2)-(iv) shall be applied mutatis mutandis to analyze the impact of the acquisition or split on the finances of the issuer.
(v) The auditing procedures in IV-1-(2)-(v) shall be applied mutatis mutandis to analyze the impact of the acquisition or split on the finances of the issuer.
2. Assess whether any of the following circumstances exists with respect to the current acquisition or split duly conducted in accordance with laws and regulations:
(1) Review the minutes of the directors’ meeting of the company that passed the resolution to carry out the plan for acquisition or split and capital increase, to determine whether the plan is consistent with Article 8 of the Enterprise Mergers and Acquisitions Act.
(2) Obtain the minutes of the directors’ meetings and shareholders’ meetings to determine whether the current acquisition or split and capital increase plan is consistent with Articles 28, 29, or 32 of the Enterprise Mergers and Acquisitions Act.
(3) Obtain the company’s conversion contract or split plan and the given shareholders’ meeting minutes, to determine whether the current acquisition or split and capital increase is consistent with Articles 30 or 33 of the Enterprise Mergers and Acquisitions Act.
(4) Review the company’s articles of incorporation, to determine whether the current capital increase is consistent with Paragraph 1 of Article 278 of the Company Act.
(5) Whether the current acquisition or split duly conducted in accordance with laws and regulations is consistent with Article 51-2 of the Operating Rules of the Taiwan Stock Exchange Corporation and Article 16-3 of the R.O.C. Over-the-Counter Securities Exchange 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 split and issue of new shares in accordance with laws and regulations.
(6) Obtain a legal opinion issued by a lawyer to determine whether the current acquisition or split and issuance of new shares is consistent with the Fair Trade Act.
(7) Conduct an itemized assessment of the matters enumerated in Attachment 31 and Attachment 32.
3. The reasonableness of the current acquisition or split and issuance of new shares and the impact of the acquisition or split 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.
Interview the management and decision-makers of both companies and obtain information on their internal assessment of the acquisition or split plan, to analyze the reasonableness of the objectives of the acquisition or split plan and the feasibility and necessity of the acquisition or split 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 split division, and any matters related to assumption by the issuer of rights or obligations of the acquired company or split 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 split 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 split, 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 split, and the expected benefits and reasonableness thereof.
4. Other necessary auditing procedures.Issuance of New Shares Due to Acquisition or Split
1. The business and financial conditions of the acquired company or split division and the impact of the acquisition or split on the business and finances of the issuer:
(1) Business condition:
(i) Market analysis:
Collect relevant information on the supply condition of major raw materials of the acquired company or split division, its main products, and major sales areas, and assess its potential for future growth.
(ii) Business scope:
(a) Obtain information on the products or services currently provided by the acquired company or split division, and inquire with the company’s relevant personnel to understand the main applications or functions of such products or services.
(b) The auditing procedures in III-2-(1)-(ii)-(e) shall be applied mutatis mutandis to analyze the possible impact of the acquisition or split on the business operations of the issuer.
(c) Obtain the details of business transactions between the acquired company or split division and its original affiliated enterprise companies in the past three fiscal years to the date of issuance of the underwriter’s assessment report, and determine whether there have been any irregular transactions. If yes, ascertain the status of correction and the impact of the acquisition or split on the business operations of the issuer.
(d) Analyze the possible impacts of the business transactions between the acquired company or split division and former affiliates thereof on the issuer after the acquisition or split.
(2) Financial condition:
(i) Obtain a statement from the acquired company or the split division and an attorney letter to determine whether the acquired company or split division and affiliated enterprises thereof are currently engaged in major litigation, non-litigation, case or administrative litigation cases, and analyze the impact of the acquisition or split on the financial condition of the issuer.
(ii) Obtain the relevant information on the acquired company’s major property transactions, endorsements/guarantees, major commitments, and loans of funds to other parties, or relevant details of other transactions as of the date of issuance of the underwriter’s assessment report, to determine the presence of irregularities and the impact of the acquisition or split on the financial condition of the issuer.
(iii) The auditing procedures in IV-1-(2)-(iii) shall be applied mutatis mutandis to analyze the impact of the acquisition or split on the finances of the issuer.
(iv) The auditing procedures in IV-1-(2)-(iv) shall be applied mutatis mutandis to analyze the impact of the acquisition or split on the finances of the issuer.
(v) The auditing procedures in IV-1-(2)-(v) shall be applied mutatis mutandis to analyze the impact of the acquisition or split on the finances of the issuer.
2. Assess whether any of the following circumstances exists with respect to the current acquisition or split duly conducted in accordance with laws and regulations:
(1) Review the minutes of the directors’ meeting of the company that passed the resolution to carry out the plan for acquisition or split and capital increase, to determine whether the plan is consistent with Article 8 of the Enterprise Mergers and Acquisitions Act.
(2) Obtain the minutes of the directors’ meetings and shareholders’ meetings to determine whether the current acquisition or split and capital increase plan is consistent with Articles 28, 29, or 32 of the Enterprise Mergers and Acquisitions Act.
(3) Obtain the company’s conversion contract or split plan and the given shareholders’ meeting minutes, to determine whether the current acquisition or split and capital increase is consistent with Articles 30 or 33 of the Enterprise Mergers and Acquisitions Act.
(4) Review the company’s articles of incorporation, to determine whether the current capital increase is consistent with Paragraph 1 of Article 278 of the Company Act.
(5) Whether the current acquisition or split duly conducted in accordance with l |
| 5 |
Issuance of Convertible Corporate Bonds
In addition to compliance with these Key Points, 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) Review the company’s financial statements for the past three fiscal years audited and certified by a CPA, present itemized calculations, and state whether there are violations of applicable provisions of Articles 249 and 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 reported (applied for) 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 for Underwriters Guiding Offerings and Issuance of Securities by the Issuer promulgated by the Chinese 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 provisions.
(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 III-8 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 past three fiscal years and the company’s articles of incorporation, review the company’s share dividend policy and inquire with the relevant company personnel to understand whether the share dividend plan in the coming year is consistent with the relevant provisions of the Self-Regulatory Rules for Underwriters Guiding Offerings and Issuance of Securities by the Issuer promulgated by the Chinese 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.Issuance of Convertible Corporate Bonds
In addition to compliance with these Key Points, 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) Review the company’s financial statements for the past three fiscal years audited and certified by a CPA, present itemized calculations, and state whether there are violations of applicable provisions of Articles 249 and 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 reported (applied for) 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 for Underwriters Guiding Offerings and Issuance of Securities by the Issuer promulgated by the Chinese 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 provisions.
(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 III-8 shall apply mutatis mutandis to the current issue of con |
| 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. |
| 7 |
Issuance of Ordinary Corporate Bonds
1. Market conditions and prospects for future development of the business the issuer is in: (◎)
The auditing procedures in III-1 shall apply mutatis mutandis to the offering and issuance of ordinary corporate bonds.
2. The business and financial condition of the issuer: (◎)
(1) Business condition:
(i) The auditing procedures in III-2-(1)-(i) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(ii) The auditing procedures in III-2-(1)-(ii)-(a) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(2) Financial condition:
(i) The auditing procedures in III-2-(2)-(i) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(ii) The auditing procedures in III-2-(2)-(ii) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(iii) The auditing procedures in III-2-(2)-(vi) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(iv) The auditing procedures in III-2-(2)-(vii) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(v) The auditing procedures in III-2-(2)-(ix) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(3) Combine the above-stated business and financial information, and carry out an itemized assessment of their advantages and disadvantages and countermeasures.
3. Implementation status of the aforementioned capital increase or issues of corporate bonds:
The auditing procedures in III-6 shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds. (◎)
4. Determine whether any of the following circumstances exist with respect to the current offering and issuance of ordinary corporate bonds.
(1) Review the resolutions relevant to the current offering and issuance of ordinary corporate bonds in the minutes of the directors’ and shareholders’ meetings.
(2) Review the company’s financial statements for the past three fiscal years audited and certified by a CPA, present itemized calculations, and state whether there are violations of applicable provisions of Articles 246, 247, 249, and 250 of the Company Act and Article 28-4 of the Securities and Exchange Act.
(3) Carry out an itemized analysis of the items enumerated in Attachments 31 and 32.
(4) If the current issue of corporate bonds is issued under the shelf registration system, carry out an itemized analysis of the items enumerated in Attachment 32-1.
(5) Review the offering terms and conditions of the current issue of ordinary corporate bonds and related materials to ensure compliance with the Self-Regulatory Rules for Underwriters Guiding Offerings and Issuance of Securities by the Issuer promulgated by the Chinese Securities Association and relevant rules and regulations.
(6) 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 ordinary corporate bonds is reported (applied for) by the ceiling method.
5. The auditing procedures in III-9 shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
6. Evaluate each of the following items in the offering terms and conditions of the current issue of ordinary corporate bonds to determine its reasonableness and the impact on the equity of the original shareholders and the holders of the ordinary corporate bonds:
(1) The method through which the issuance price and the conversion price are determined, as well the parameters and basic assumptions, sampling data, and deduction process.
(2) Whether the rate of yield of the ordinary corporate bonds and the right of sellback take into reference the rates of the financial institutions, issuance cost of other companies within the same business, prospects for the company’s operations, profitability, and credit rating.
(3) Call or redemption provisions.
(4) Restrictive terms and conditions.
(5) Relevant restrictive provisions.
(6) Other important stipulations.
7. Determine whether the creditor rights of the corporate bonds are secure (including the presence of any collateral and the type and value thereof). If the bonds are unsecured, determine the items evaluated by a credit rating agency and the rating results.
8. The auditing procedures in III-10 shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds. (◎)
9. Determine whether, from the date the most recent balance sheet is audited and certified (or reviewed) by the CPA to the issuance date of the evaluation report prepared by the underwriter, any event set forth in Subparagraph 2 of Paragraph 2 of Article 36 of the Securities and Exchange Act has occurred, so as to assess the impact of such events on the shareholders’ equity and share prices.
10. Other necessary assessment and auditing procedures.
11. If the ordinary corporate bonds are issued through private placement, the aforementioned assessment and auditing procedures marked with (◎) may be omitted.Issuance of Ordinary Corporate Bonds
1. Market conditions and prospects for future development of the business the issuer is in: (◎)
The auditing procedures in III-1 shall apply mutatis mutandis to the offering and issuance of ordinary corporate bonds.
2. The business and financial condition of the issuer: (◎)
(1) Business condition:
(i) The auditing procedures in III-2-(1)-(i) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(ii) The auditing procedures in III-2-(1)-(ii)-(a) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(2) Financial condition:
(i) The auditing procedures in III-2-(2)-(i) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(ii) The auditing procedures in III-2-(2)-(ii) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(iii) The auditing procedures in III-2-(2)-(vi) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(iv) The auditing procedures in III-2-(2)-(vii) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(v) The auditing procedures in III-2-(2)-(ix) shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
(3) Combine the above-stated business and financial information, and carry out an itemized assessment of their advantages and disadvantages and countermeasures.
3. Implementation status of the aforementioned capital increase or issues of corporate bonds:
The auditing procedures in III-6 shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds. (◎)
4. Determine whether any of the following circumstances exist with respect to the current offering and issuance of ordinary corporate bonds.
(1) Review the resolutions relevant to the current offering and issuance of ordinary corporate bonds in the minutes of the directors’ and shareholders’ meetings.
(2) Review the company’s financial statements for the past three fiscal years audited and certified by a CPA, present itemized calculations, and state whether there are violations of applicable provisions of Articles 246, 247, 249, and 250 of the Company Act and Article 28-4 of the Securities and Exchange Act.
(3) Carry out an itemized analysis of the items enumerated in Attachments 31 and 32.
(4) If the current issue of corporate bonds is issued under the shelf registration system, carry out an itemized analysis of the items enumerated in Attachment 32-1.
(5) Review the offering terms and conditions of the current issue of ordinary corporate bonds and related materials to ensure compliance with the Self-Regulatory Rules for Underwriters Guiding Offerings and Issuance of Securities by the Issuer promulgated by the Chinese Securities Association and relevant rules and regulations.
(6) 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 ordinary corporate bonds is reported (applied for) by the ceiling method.
5. The auditing procedures in III-9 shall apply mutatis mutandis to the current offering and issuance of ordinary corporate bonds.
6. Evaluate each of the following items in the offering terms and conditions of the current issue of ordinary corporate bonds to determine its reasonableness and the impact on the equity of the original shareholders and the holders of the ordinary corporate bonds:
(1) The method through which the issuance price and the conversion price are determined, as well the parameters and basic assumptions, sampling data, and deduction process.
(2) Whether the rate of yield of the ordinary corporate bonds and the right of sellback take into reference the rates of the financial institutions, issuance cost of other companies within the same business, prospects for the company’s operations, profitability, an |
| 8 |
Issuance of Exchangeable Corporate Bonds
In addition to the procedures set forth in VII, assessment and audit shall include the following:
1. Review the company’ most recent s financial statements as audited and certified (or reviewed) by the CPA, along with the terms and conditions of issuance and exchange of the current issuance of corporate bonds, to understand whether the aforementioned are consistent with the relevant provisions of the Self-Regulatory Rules for Underwriters Guiding Offerings and Issuance of Securities by the Issuer promulgated by the Chinese Securities Association.
2. Analyze the following issuance and exchange conditions for the exchangeable corporate bonds; determine their reasonableness and impact on current shareholders and holders of exchangeable bonds.
(1) Number of years for the issuer to hold the underlying and the method of custody.
(2) The method through which the issuance price and the exchange price are determined, as well as the parameters and basic assumptions, sampling data, and deduction process.
(3) Whether the rate of yield of the exchangeable 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, prospects of the company’s operations, profitability, and credit rating.
(4) Whether with respect to entitlement to interest and dividends during the year of exchange it is clearly stated that the creditors can exercise their rights to exchange and claim dividends.
(5) Call or redemption provisions.
(6) Timing and method of exchange price adjustments.
(7) Procedures for request of exchange and payment method.
(8) Restrictive provisions.
(9) Sellback rights of bondholders.
(10) Other important stipulations.
3. The auditing procedures in III-8 shall apply mutatis mutandis to the underlying company to analyze the impact on the determination of the exchange price.
4. Other necessary assessment and auditing procedures. |
| 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 affiliated enterprises, 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. The auditing procedures in III-1 shall apply mutatis mutandis to understand the status quo and prospects for future development of the market to which the company’s business belongs.
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
(i) 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.
(ii) 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.
(iii) Inquire with the company’s relevant personnel and obtain relevant information on the functions, job descriptions, and responsibilities of the various company departments to determine their reasonableness and whether operational efficiency can be increased.
(iv) 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.
(v) Obtain relevant information on financial planning and capital use to determine its reasonableness.
(vi) 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) Obtain the company’s operational plan, production and sales plan, and financial forecast for the coming year to determine its reasonableness and the feasibility of its attainment.
(7) Review the company’s financial report and internal materials certified by the CPA to understand the major property transactions, loans, and endorsements/guarantees between the issuer and its related parties within the past fiscal year, and make a sample inspection of the relevant certificates to determine the presence of irregularities. (Attachment 16)
(8) The auditing procedures in III-10 shall apply mutatis mutandis to the current establishment by public offering.
(9) Other important issues.
5. Other necessary auditing procedures.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 affiliated enterprises, 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. The auditing procedures in III-1 shall apply mutatis mutandis to understand the status quo and prospects for future development of the market to which the company’s business belongs.
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
(i) 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.
(ii) 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.
(iii) Inquire with the company’s relevant personnel and obtain relevant information on the functions, job descriptions, and responsibilities of the various company departments to determine their reasonableness and whether operational efficiency can be increased.
(iv) 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.
(v) Obtain relevant information on financial planning and capital use to determine its reasonableness.
(vi) 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) Obtain the company’s operational plan, production and sales plan, and financial forecast for the coming year to determine its reasonableness and the feasibility of its attainment.
(7) Review the company’s financial report and internal materials certified by the CPA to understand the major property transactions, loans, and endorsements/guarantees between the issuer and its related parties within the past fiscal year, and make a sample inspection of the relevant certificates to determine the presence of irregularities. (Attachment 16)
(8) The auditing procedures in III-10 shall apply mutatis mutandis to the current establis |
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Public Offer to Unspecified Persons by the Security Holder
1. The auditing procedures in III-1 shall apply mutatis mutandis to understand the status quo and prospects for future development of the market to which the company’s business belongs.
2. The issuer’s business and financial condition and financial forecast:
(1) Business condition:
(i) Market Analysis: Obtain the relevant information on the company’s major raw materials supply situation, main products, area of sales, and the company’s position within the industry (market share) to determine its future growth potential.
(ii) The auditing procedures in III-2-(1)-(ii)-(a) shall apply mutatis mutandis to the current public offering.
(2) Financial condition:
(i) The auditing procedures in III-2-(2)-(i) shall apply mutatis mutandis to the current public offering.
(ii) The auditing procedures in III-2-(2)-(ii) shall apply mutatis mutandis to the current public offering.
(iii) Obtain legal opinions from lawyers and relevant statements and inquire with the company’s legal personnel to understand whether there have been any major litigation, non-litigation, or administrative litigation cases involving the company, its directors or supervisors, president, or major shareholders holding not less than 10 percent of shares, over the past three fiscal years to the date of publication.
In addition, review the financial reports certified by the CPA and obtain statements from the company or legal opinions from lawyers to understand whether the company has experienced financial difficulties over the past three fiscal years.
(iv) The auditing procedures in III-2-(2)-(ix) shall apply mutatis mutandis to the current public offering.
(3) Financial Forecast and Dividend Plan (Attachment 22)
(i) The auditing procedures in III-2-(3)-(iii) shall apply mutatis mutandis to the current public offering.
(ii) If the issuer has publicly announced its financial forecast, inquire with the company’s relevant personnel and obtain relevant information on the financial forecast certified by the CPA, the business operations plan for the coming year, and the production and sales plan, to determine the reasonableness of the business operations plan for the coming year, the production and sales plan, the financial forecast, and the dividend distribution plan for the coming year, as well as the feasibility of their attainment.
3. Determine the reasonableness and feasibility of the current public offering:
(1) Obtain the current market price reference information of the securities and the net value information of the issuer from the most recent financial statements 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 statements and related materials of the issuer to determine whether the current public offering is consistent with the provisions of Article 65 of the Criteria Governing the Offering and Issuance of Securities by Securities Issuers. (Attachment 35)
(4) The auditing procedures in III-8 shall apply mutatis mutandis to the current public offering.
(5) The auditing procedures in III-5 shall apply mutatis mutandis to the current public offering.
(6) Obtain the securities transaction details of the holder of the securities for the past three fiscal years until the current transaction 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.
The auditing procedures in III-2-(2)-(ix) shall apply mutatis mutandis to understand the issues relevant to the two parties.
5. The auditing procedures in III-10 shall apply mutatis mutandis to the current public offering.
6. The auditing procedures in III-9 shall apply mutatis mutandis to the current public offering.
7. Other necessary auditing procedures.Public Offer to Unspecified Persons by the Security Holder
1. The auditing procedures in III-1 shall apply mutatis mutandis to understand the status quo and prospects for future development of the market to which the company’s business belongs.
2. The issuer’s business and financial condition and financial forecast:
(1) Business condition:
(i) Market Analysis: Obtain the relevant information on the company’s major raw materials supply situation, main products, area of sales, and the company’s position within the industry (market share) to determine its future growth potential.
(ii) The auditing procedures in III-2-(1)-(ii)-(a) shall apply mutatis mutandis to the current public offering.
(2) Financial condition:
(i) The auditing procedures in III-2-(2)-(i) shall apply mutatis mutandis to the current public offering.
(ii) The auditing procedures in III-2-(2)-(ii) shall apply mutatis mutandis to the current public offering.
(iii) Obtain legal opinions from lawyers and relevant statements and inquire with the company’s legal personnel to understand whether there have been any major litigation, non-litigation, or administrative litigation cases involving the company, its directors or supervisors, president, or major shareholders holding not less than 10 percent of shares, over the past three fiscal years to the date of publication.
In addition, review the financial reports certified by the CPA and obtain statements from the company or legal opinions from lawyers to understand whether the company has experienced financial difficulties over the past three fiscal years.
(iv) The auditing procedures in III-2-(2)-(ix) shall apply mutatis mutandis to the current public offering.
(3) Financial Forecast and Dividend Plan (Attachment 22)
(i) The auditing procedures in III-2-(3)-(iii) shall apply mutatis mutandis to the current public offering.
(ii) If the issuer has publicly announced its financial forecast, inquire with the company’s relevant personnel and obtain relevant information on the financial forecast certified by the CPA, the business operations plan for the coming year, and the production and sales plan, to determine the reasonableness of the business operations plan for the coming year, the production and sales plan, the financial forecast, and the dividend distribution plan for the coming year, as well as the feasibility of their attainment.
3. Determine the reasonableness and feasibility of the current public offering:
(1) Obtain the current market price reference information of the securities and the net value information of the issuer from the most recent financial statements 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 statements and related materials of the issuer to determine whether the current public offering is consistent with the provisions of Article 65 of the Criteria Governing the Offering and Issuance of Securities by Securities Issuers. (Attachment 35)
(4) The auditing procedures in III-8 shall apply mutatis mutandis to the current public offering.
(5) The auditing procedures in III-5 shall apply mutatis mutandis to the current public offering.
(6) Obtain the securities transaction details of the holder of the securities for the past three fiscal years until the current transaction 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.
The auditing procedures in III-2-(2)-(ix) shall apply mutatis mutandis to understand the issues relevant to |