May 2022
Grace Chou and Weke Chen
For corporate control contests in major companies in Taiwan, the tug-of-war between shareholders is often the focus of legal scrutiny. As far as securities investment trust enterprises (hereinafter, the “SITEs”) and securities investment consulting enterprises (hereinafter, the “SICEs”) are concerned, since the funding sources for their operation of securities investment trust business and the discretionary investment business are from the general investors and their customers, if they get involved in corporate control contests via investment through securities investment trust funds (hereinafter, the “Investment Funds”) or discretionary investment assets (hereinafter, the “Discretionary Assets”), this will be detrimental to investment protection and undermine the rights and interests of the public.
The Financial Supervisory Commission (hereinafter, the “FSC”) issued the Jin-Guan-Zheng-Tou-Zi-1110380579 Circular on March 22, 2022 to specifically provide that the SITEs and SICEs shall not directly or indirectly get involved in any corporate control contests for their investment target or assist any person to obtain or secure corporate control when operating securities investment trust business or discretionary investment business.
The FSC also stressed that the SITEs and SICEs should carry out their investment operations such as analysis, decision-making, execution, and review as part of their investment process and internal control system they have created and prudently invest the assets under management under the principles of professionalism and good faith. Further, before the Investment Funds or the Discretionary Assets are utilized for investment, it is necessary to analyze if there are any corporate control contests involving their investment targets and their directly or indirectly invested businesses. Moreover, they shall regularly review, evaluate, and control relevant investment activities after the investment is made to avoid improper arrangements such as getting involved in corporate control contests, assisting others to obtain or secure corporate control, etc.[1]
If the SITEs and SICEs become involved in any corporate control contests for their investment targets or the business directly or indirectly invested by such businesses or help others obtain or secure corporate control when using the Investment Funds or Discretionary Assets for investment in violation of the requirements in the above-mentioned circular, the SITEs and SICEs may be deemed, depending on the specific circumstances of the violation, to constitute a violation of the requirement that they shall not accept instructions from specific persons or facilitate operations that undermine the principles of being law-abiding, good faith, and professional investment management, or that SITEs and SICEs shall not engage in matters prohibited by laws and regulations or by the FSC (see Articles 10, Paragraph 1, Subparagraph 20 and Article 54, Paragraph 1, Subparagraphs 9 and 10 of the Regulations Governing Investment Trust Funds, and Article 14, Paragraph 1, Subparagraph 9 of the Regulations Governing the Conduct of Discretionary Investment Business by Securities Investment Trust Enterprises and Securities Investment Consulting Enterprises).
With respect to penalties, the FSC may impose a reprimand or penalty, pursuant to law, on SITEs and SICEs that violate the law (see Article 102 of the Securities Investment Trust and Consulting Act) and may, depending on the severity of the violation, impose a warning, order the business to remove its directors, supervisors, or managers from their office, suspend the whole or part of the business’s public offering or private placement of Investment Funds or acceptance of new discretionary investment business for up to two years, suspend the whole or part of the business of the company or its branch for up to six months, revoke the business license of the company or its branch, or take other necessary measures (see Article 103 of the Securities Investment Trust and Consulting Act). In conclusion, if the SITEs and SICEs are deemed to have illegally got involved in the corporate control contests for their investment targets, they may be subject to the maximum penalty of business license revocation imposed by the FSC, and relevant enterprises should be prudent in their investment activities and thoroughly implement their legal compliance and internal control systems.
[1] The FSC issued a circular to stipulate that the SITEs and SICEs shall not directly or indirectly get involved in the corporate control contests for their investment targets or help others obtain or secure corporate control. FSC’s Newsletter, March 22, 2022 https://www.fsc.gov.tw/ch/home.jsp?id=96&parentpath=0,2&mcustomize=news_view.jsp&dataserno=202203220002&dtable=News