TSMC in US$290M Settlement With China's Biggest Chip Maker

Taiwan Semiconductor Manufacturing (TSMC) reached an out-of-court settlement valued at US$290.2 million with China's biggest chip maker after a court-room victory in a case concerning theft of trade secrets, patent infringement and breach of contract over a prior settlement between the two companies.

As part of the settlement, Semiconductor Manufacturing International (SMIC) will pay TSMC $200 million in cash, as well as stock and warrants that could allow TSMC to take up to a 10 percent stake in SMIC. The stock and warrants were valued at around $90.2 million by Steve Chang, a stock trader at Taishin Securities in Taipei.

Last week, a jury at the Superior Court of California in Alameda County ruled in favor of TSMC, the world's largest contract chip maker, in the case against SMIC, the biggest contract chip maker in China. The court had already started proceedings to determine damages.

The settlement ends all outstanding court action between the two companies, including a remaining US$40 million payment SMIC owes TSMC from a previous case. The deal will also allow SMIC to continue to use TSMC trade secrets and technology disputed in the case.

"SMIC believes this settlement is a win-win for the parties, resolving uncertainty for their employees, mutual customers, and other stakeholders," SMIC said in a statement to the Stock Exchange of Hong Kong.

But the settlement could lead to new problems for TSMC with the government of Taiwan. Regulations on the island prohibit certain technology transfer and investments in China because of long-standing threats by China to invade Taiwan. The island split from China in 1949 amid civil war, and China has regarded Taiwan as a renegade province ever since.

A TSMC spokesman said that regulatory authorities will have to change rules to permit the ownership of stock offered by SMIC as part of the settlement. "This would be a passive ownership of shares," said J.H. Tzeng, deputy spokesman of TSMC.

TSMC will not be allowed to vote for members of SMIC's board of directors with its shares, SMIC said in the statement. TSMC's voting rights will also be restricted to a vote in favor of actions recommended by the board.

SMIC will issue 1.79 billion new shares of its Hong Kong listed stock to TSMC as part of the settlement, or 8 percent of the company after new shares are issued. SMIC will also give TSMC warrants to buy an additional 696 million shares for HK$1.30 per share (US$0.17). Should TSMC opt to exercise the warrants, it would gain another 2 percent of SMIC, for a total ownership of 10 percent of the Chinese chip maker.

The two chip makers first went to court in December 2003, in a patent infringement and trade secrets theft case that was ultimately settled in 2005 with a US$175 million payment to TSMC and a cross-licensing deal. But the relationship turned sour soon after and TSMC filed the current case just a year later.

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