Sean Tsou
The Supreme Court rendered the 108-Tai-Shang-132 Decision of October 23, 2019 (hereinafter, the “Decision”), holding that before supervisors’ substantive review of financial reports or the lack of such review is confirmed, it is not appropriate to conclude directly that the supervisors are not liable for compensation for any falsehood in the financial reports merely on the ground that they leave office before the financial reports are filed.
The backgrounds of this Decision are summarized as follows. Chairman B of Company A, which is an OTC-traded company, sought to evade the recognition of inventory depreciation losses of the company in order to beautify Company A’s operating status by colluding with other members of Company A’s management to recognize false sales revenues in the company’s books and records through false circular sales and fake addition of operating revenues. As a result, the information about the Company A’s operating revenue for March 2007 and the financial reports for three quarters of the same year all reflected false results with overstated operating revenues. Since there were investors in the market who were injured out of misbelief in Company A’s false revenue information and financial reports, the Securities and Futures Investors Protection Center (hereinafter, the “SFIPC”) brought charges against Chairman B and other members of the company’s management to pursue their joint and several liabilities to the market investors with the company.
Trial court previous to this Decision, which is a high court, held that Supervisors C and D of Company A sued by the SFIPC were not liable on the ground that when C resigned as a supervisor, the first quarter of 2007 for which the false financial reports were prepared had been concluded, and when D left office as a supervisor, two thirds of the third quarter of 2007 for which the false financial reports were prepared had also elapsed, not to mention that neither C nor D signed the false financial reports. However, in this Decision, the Supreme Court held that under Article 218 of the Company Law, a supervisor has the right and duty to investigate the financial and business status of the company and audit books and records from time to time. In addition, Article 8, Paragraph 2 of the Company Law and Article 20-1, Paragraph 1 of the Securities and Exchange Law provide that supervisors of a company limited by share shall be its legal representatives within the remit of their responsibility and shall be liable for compensation to bona fide acquirers, sellers or holders of securities issued by the company for their damage in the event of falsehood or concealment in the financial reports and financial and business documents under Article 20, Paragraph 2 of the Securities and Exchange Law. Therefore, the Supreme Court held that since supervisors have the duty to approve and recognize the financial reports announced and filed after their thorough review through substantive examination of financial reports, the high court is rash when it jumped to the conclusion that C and D did not have to be held liable for compensation for false financial reports on the ground that C and D had left office before the financial reports were released and had not signed the financial reports. Therefore, the portions of the original decision that had concluded that C and D are not liable for compensation were reversed and remanded to the high court.