June 2023
Oli Wong and Lilian Hsu
The Constitutional Court of Taiwan rendered the 112-Xian-Pan-5 Decision of April 28, 2023, in which the grand justices held that the provisions on mandatory tender offers in the Securities and Exchange Act do not violate the principles of clarity of criminal penalties and clarity of authorization. The case is summarized as follows.
Case facts[1]
The two applicants in this case were senior executives of China Development Financial Holding Corporation (hereinafter, “CDF”). The applicants were involved in CDF’s merger and acquisition plans for acquiring Taiwan International Securities Co, Ltd. and other entities. It was planning to execute agreements and transfer a total of 42.93% of the shares of Global Securities Finance Corporation by phase from November 15 to December 29 of 2005. Although the above transaction plans were to transfer less than 20% of the shares every 50 days and did not execute the public tender offer procedure, still the applicants had made one of the CDF’s affiliates, CDIB Partners Investment Holding Corporation, acquired over 20% of the shares through the signing of the agreements. Therefore, the court regarded this behavior as a violation of the relevant provisions of the Securities and Exchange Act (hereinafter, the “SEA”) concerning mandatory tender offers and imposed criminal punishment accordingly. After the judgment became final,[2] the two applicants applied for a constitutional interpretation of the potentially unconstitutional provision at issue of the SEA.
Legal provisions related to the case
1. Article 175 of the SEA, as amended and promulgated on February 6, 2002, stipulates: “Anyone who .. the provisions of Article 43-1… Paragraph 3… shall be punished with imprisonment of up to 2 years, detention, or, in lieu thereof or in addition thereto, a fine of up to NT$1.8 million” (hereinafter, the “First Provision at Issue”) and Article 43-1, Paragraph 3 of the SEA stipulates: “Any person who individually or in conjunction with others plans to acquire a certain percentage of the total issued shares of a public company shall, unless certain conditions are met, do so through a public tender offer” (hereinafter, the “Second Provision at Issue”).
Any person planning to acquire a certain percentage of the shares of a public company is required to do so via a public tender offer unless there are exceptional circumstances. This means that the securities should be purchased from non-specific persons through a tender offer. A violation is subject to up to two years in prison in accordance with Article 175 of the SEA.
2. The latter part of Article 43-1, Paragraph 4 of the SEA provides: “…the specific percentage and conditions referred to in the preceding paragraph shall be set by the competent authority” (hereinafter, the “Third Provision at Issue”). In addition, Article 11, Paragraph 1 of the Regulations Governing Public Tender Offers for Securities of Public Companies provides: “Any person who individually or jointly with another person(s) plans to acquire within 50 days shares accounting for 20 percent or more of the total issued shares of a public company shall do so via a public tender offer” (hereinafter, the “Fourth Provision at Issue”).
The competent authority has formulated the Regulations Governing Public Tender Offers for Securities of Public Companies pursuant to the authorization under the latter part of Article 43-1, Paragraph 4 of the SEA, which clearly states that if a person plans to acquire more than 20% of the total issued shares of a public company within 50 days, they must do so via a public tender offer.
Issues in dispute
1. Do the literal meanings of “planning to acquire” and “planning to acquire within 50 days” in the requirements under the First through the Fourth Provisions at Issue violate the principle of clarity of criminal penalties?
2. Do the constituting criteria of the “certain percentage” and “certain conditions” in the latter part of the Third Provision at Issue, which are set by the competent authority authorized to do so, violate the principle of clarity of authorization?
The opinion of the Constitutional Court on the clarity of criminal penalties
1. Legal provisions on criminal penalties, which involve the deprivation and restriction of people’s lives, personal freedom, and property rights, must be expressly stipulated by law at the time of the offense. In addition, the elements of the crime must be foreseeable by those subject to the legal provisions in order to meet the requirement of legal clarity.
Whether the constituting criteria of offenses under legal provisions on criminal penalties are clear should be assessed based on whether such criteria can be foreseen by “those who are generally subject to the legal provisions,” not on whether they are foreseeable to people with ordinary intelligence and knowledge. The “foreseeability” should be determined by combining the legal provisions on criminal penalties and the relevant provisions used to supplement the criteria of an offense for overall observation.
2. The grand justices held that although the actor of the behavior under the Second Provision at Issue is specified as “any person,” still the major target of regulation under such an article should be company operators and related practitioners capable of acquiring substantial shares in the capital market (i.e., “substantial share acquirers”). These individuals generally possess a higher level of professional knowledge and expertise in public tender offer in the capital market compared to people with ordinary intelligence and knowledge. Therefore, when considering whether the First to Fourth Provisions at Issue meet the principle of clarity of criminal penalties should be determined based on the comprehension of substantial share acquirers.
3. For substantial share acquirers, they would definitely conduct detailed planning before engaging in an acquisition. Therefore, they should be able to understand and foresee the concepts that “planning to acquire” refers to “prearranged acquisition,” that “planning to acquire within 50 days” refers to “planning to acquire by way of agreement within 50 days,” and that “a certain percentage” should include “over twenty percent.” Therefore, the grand justices concluded that the First to the Fourth Provisions at Issue do not violate the principle of clarity of criminal penalties.
The opinion of the Constitutional Court on the clarity of authorization
1. The legislative branch can authorize the executive branch to issue orders to supplement laws, provided that the authorization is clear. “Clarity of authorization” means that the purpose, content, and scope of the authorization should be specific and enable people to foresee the possibility of being punished under the legal provisions made under such authorization.
2. The purpose of the Second Provision at Issue is to prevent substantial acquisitions of securities from affecting the prices of individual stocks. As to the extent to which the quantity of acquisition affects stock market prices, this is a matter that the competent authority is most knowledgeable thanks to its expertise in the professional domain of the securities market. The terms “a certain percentage” and “certain conditions” in the Third Provision at Issue authorize the competent authority to determine the control threshold for conducting mandatory public tender offer and exemptions. In this regard, the purpose, content, and scope of the authorization are specific and clear
3. According to the First and Second Provisions at Issue as the authorization law, it is evident that in case the total number of shares issued by a public company to be acquired reaches the threshold for a mandatory public tender offer, if it is not carried out through a public tender offer procedure, there is a risk of criminal punishment and sanction. In this regard, an overall observation of the authorization law that grants the authorization is sufficient to allow the people to foresee the possibility of being punished for their behavior. Therefore, the authorization is clear. Based on the foregoing, the Third Provision at Issue does not violate the principle of clarity of authorization.
[1] This is a summary prepared based on the 99-Jin-Shang-Zhong-Zi-61 Criminal Decision of the Taiwan High Court.
[2] The 104-Tai-Shang-Zi-720 Criminal Decision of the Supreme Court
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