January 2023
Pei-Ching Ji and Sean Tang
1. Introduction
Article 157-1 of the Securities and Exchange Act (hereinafter, the “Act”) contains provisions that prohibit insider trading. The timing of the establishment or clarity of material information is crucial to the examination by the securities authority, the investigation by the prosecution, the judgment handed down by the court, and even the investment behavior of the regulated persons. Therefore, this article is intended to introduce the relevant provisions and practical insights on this topic.
2. Relevant provisions
When Article 157-1 was added to the Act on January 12, 1988, it did not regulate the timing of establishment or clarity of material information. It was not until 2010 that the legislators achieved comprehensive regulation and avoided disputes by adding the wording “after the information is precise” to the first paragraph of Article 157-1 of the Act, which specifically provides that if the person specified in Paragraph 1 has actual knowledge of the information about the company issuing the stock that significantly affects the price of the stock or the ability of the stock issuing company to pay principal and interest, the prohibition against insider trading applies only when the “information is precise.”
In addition, based on the authorization under Article 157-1 of the Act, the Financial Supervisory Commission (hereinafter, the “FSC”) of the Executive Yuan promulgated in 2006 the Regulations Governing the Scope of Material Information and the Means of Its Public Disclosure Under Article 157-1, Paragraph 4 of the Securities and Exchange Act and stipulated in Article 4 of the regulations, in reference to the decisions of the U.S. Federal Supreme Court, as follows: “The establishment timing of the information specified in the preceding two articles shall be the date of occurrence of the fact, the date of agreement, the date of execution, the date of payment, the date of commission, the closing date of the transaction, the date of transfer, the date of resolution by the audit committee or the board of directors, or ‘other date when the information can be sufficiently confirmed,’ whichever is earlier.” Subsequently, to accommodate the 2010 amendment to Act, the FSC revised the regulations into the Regulations Governing the Scope of Material Information and the Means of Its Public Disclosure Under Article 157-1, Paragraphs 5 and 6 of the Securities and Exchange Act (hereinafter, the “Regulations”) and moved the original Article 4 to Article 5, based on the requirement that “we should focus on the impact of information on investors’ securities transactions, measure the probability of its occurrence and the possible impact on investors’ investment decisions, and it is not necessary for the information to be confirmed,” the original wording “other date when the information can be sufficiently confirmed” were amended to “other precise date based on concrete evidence” .
Based on the foregoing, the current requirements adopt the “multiple points in time whichever is earlier” approach to recognize the timing of establishment or clarity of material information and provide room for flexible determination in judicial practice cases, so as to avoid rigidity, and does not require the facts associated with material information as “have occurred” or “have been confirmed”.
3. Practical insights
An observation of the practical decisions shows that even before the amendment of the words “after the information is precise” in Article 157-1, Paragraph 1 of the Act, the courts still decide when material information is established or clarified when making judgment, and there is not much difference in the determination standards in practical decisions before and after the amendment of the words. Except for a few court decisions that directly recognized a specific point in time as the establishment or clarity of material information (in some cases involving insider transactions in corporate mergers and acquisitions, the date of the board resolution was recognized as the date of establishment of the information)[1] without sufficiently stating the criteria for the determination, most court judgments decide when material information is established or clarified based on “an objective observation showing that the essence of material information will surely happen within a certain period of time or it is sufficient to determine that the fact has occurred” or “has a significant impact on the investment decision of a reasonable investor” or other viewpoints.
In practical cases involving corporate mergers and acquisitions, from the viewpoint of “an objective observation showing that the essence of material information will surely happen within a certain period of time or it is sufficient to determine that the fact has occurred,” (1) some viewed that the time point for the establishment or clarity of material information refers to the earliest time when the object of the transaction, the content of the transaction and the inevitability of actual performance become certain[2];(2) some viewed that the time point should be the time when the legal representatives of both parties reach a consensus on the share exchange ratio after due diligence[3]; (3) some held that the time point should be the time when a reasonable expert opinion on the share exchange ratio[4] is received; and still (4) some believed that the time point should be the time when both parties have reached a preliminary agreement on important items such as the merger or acquisition price and the completion of other matters that allow the smooth completion of the merger or acquisition deal (the consent of the major shareholders of the merged or acquired party to sell their shares).[5] In addition, from the perspective that “there should be an important impact on the investment decisions of reasonable investors,” (1) some believed that the timing of the clarity of material information refers to the stage when both parties to a merger or acquisition are mutually conducting due diligence,[6] while (2) some held that the timing should be the time when the transaction structure is determined and a concrete and fundamental consensus on matters such as the share exchange consideration is reached.[7]
In other decisions, such as those involving the replacement of the chairman of the board, the courts held that, from the viewpoint of “an objective observation showing that the essence of material information will surely happen within a certain period of time or it is sufficient to determine that the fact has occurred,” even though the board of directors has not yet resolved on the election of the chairman of the board, if those who are in a dominant position concerning the candidate of the chairman have decided to replace the original chairman, the material information that the resignation of the original chairman will surely be materialized in a specific recent time frame has become precise.[8] In addition, such as those involving the recognition of an investment loss or bad debt loss, the court held, from the perspective of ” important impact on the investment decisions of reasonable investors,” that when the chairman of the invested company (which is also the debtor) left the country to evade debt, and as a result, the company could not continue to operate, the entire amount of the investment by the investing company would surely be deemed lost, and the fund that was loaned would certainly become unrecoverable. Such a fact, which would definitely take place, is substantively likely to change the investors’ judgment of the original investment pricing of the stock and can be regarded as the time frame for the clarity and establishment of the “information that has a material impact on the share price.”[9]
In another decision involving updated financial projections, the court found, based on the “probability of realization” of the information and “the material impact on the investment decisions of reasonable investors,” that the company began to make specific preparations to update its financial projections after a certain closing meeting, and that the material information about the company’s updated financial projections should become precise at the end of the closing meeting at the latest, and it is not true that the material information was not established or became precise until the company actually began to update its financial projections or prepare its new financial projects with the release of the first draft of the new financial projections.[10]
In practice, the findings of different courts may vary for different case facts or even identical case facts. Take the well-known case involving Powerchip’s purchase of Macronix’s fab and formation of a strategic alliance with it for example. The facts of the case are summarized as follows. Macronix intended to sell its fab that had not been used for a long time to Powerchip while seeking a strategic alliance and cooperation with Powerchip. The deal can be divided into two main stages. In the first stage, after exploring the probability of negotiating the deal by the senior management of both parties, members of Powerchip’s team visited Macronix’s fab for a site survey and discussed with Macronix’s team matters such as the feasibility of a strategic alliance and the negotiation of the price for the sale of Macronix’s fab. The second stage involved the signing of a memorandum of understanding (MOU) between the two parties, and Powerchip and Macronix held their respective board meetings on the same day, January 18, 2006, to approve the relevant resolutions, and in the afternoon of the same day, they respectively entered the information in the Market Observation Post System to release the material information to the public. The case was remanded once by the high court and did not become final until it was appealed to the Supreme Court. Although the facts of the case were the same, and except for the original court of third instance and the court of second instance that tried the remanded case, which failed to clearly explain their determination criteria in the decision reasons, the rest of the courts all determined the time frame for the establishment or clarity of the material information in that case from the viewpoint “that the fact would surely be realized.” However, the findings of different courts are different. The court of first instance in the case held that the material information was established or became clear when the three transactions of “fab sale,” “contracted development,” and “foundry services” were all agreed upon (January 15 and 16, 2006).[11] The court of second instance in the case believed that the material information had already been established when both parties completed the merger or acquisition price and the main merger or acquisition contract framework after due diligence (December 22, 2005).[12] The court of third instance in the case viewed that the beginning of Macronix’s planning to vacate the fab was the time when the material information was established or became clear since the disposal of the fab had been finalized (November 28, 2005).[13] The retrial court held that the material information was established only when both parties formally entered into the MOU and the relevant resolutions were adopted by the respective boards of directors (January 18, 2006).[14] The court of final appeal in the case adopted the same opinion as the original court of second instance.[15]
In the famous case of Jabil’s merger with GreenPoint, the courts held that the material information was established when the parties signed the letter of intent from the viewpoint of “an objective observation showing that the essence of material information will surely happen within a certain period of time or it is sufficient to determine that the fact has occurred.”[16] In addition, the court of final appeal further stated that the emphasis should not be placed on terms such as “preliminary MOU,” “MOU,” or “non-binding MOU,” and attention should be paid, instead, to the specific content of the documents signed for the specific merger deal. In addition, whether the documents so executed are legally binding is also not an absolute determination standard, and it is inappropriate to conclude that the signing of the “non-binding MOU” in this merger case certainly does not constitute the establishment of the material information since the “MOU” or “non-binding MOU” executed in other merger or acquisition cases lack the criteria for the establishment of material information.
4. Conclusions
Before material information reaches the stage where it is legally required or appropriate to be disclosed, it often has to undergo a series of consultation procedures or developments over time before the content or events covered by the information become factual, and its development and circumstances vary from case to case. Therefore, the time frame for the establishment or clarity of material information should be determined based on specific case facts. The current regulation adopts a flexible determination approach of “multiple points in time whichever is earlier.” In practice, court decisions determined the timing of the establishment or clarity of material information case-by-case to avoid rigid findings to the extent that people with an intent to break the law, and avoid leaving more room for insider trading by deliberately delaying the time frame for the establishment of the information. However, differences in determining the timing of the establishment or clarity of material information took place as a result, and even lower and higher courts made different determinations for the same case facts. As a result, it would be difficult for those who are regulated under Article 157-1 of the Act to assess their risks and follow relevant requirements. The fundamental solution depends on the accumulation of court decisions and academic theories to establish more specific determination criteria and cases for those who are regulated under Article 157-1 of the Act to follow.
[1] See the 92-Shang-Su-605 Criminal Decision of the Taiwan High Court.
[2] See the 100-Jin-Shang-Geng-(1)-7 Criminal Decision of the Taiwan High Court.
[3] See the 100-Jin-Shang-Su-17 Criminal Decision of the Taiwan High Court.
[4] See the 100-Jin-Shang- Su-20 Criminal Decision of the Taiwan High Court.
[5] See the 106-Tai-Shang-1503 Criminal Decision of the Supreme Court.
[6] See the 108-Jin-Shang-Su-10 Criminal Decision of the Taiwan High Court.
[7] See the 110-Shang-Su-1 Civil Decision of the Intellectual Property and Commercial Court.
[8] See the 103-Jin-Su-4 Criminal Decision of the Taipei District Court of Taiwan, the 104-Jin-Shang-Su-46 Criminal Decision of the Taiwan High Court, and the 106-Tai-Shang-1122 Criminal Decision of the Supreme Court.
[9] See the 102-Jin-Shang-Zhong-Geng-(1)-5 Criminal Decision of the Taiwan High Court and the 104-Tai-Shang-3057 Criminal Decision of the Supreme Court.
[10] See the 104-Jin-63 Civil Decision of the Taipei District Court of Taiwan and the 107-Jin-Shang-1 Civil Decision of the Taiwan High Court.
[11] See the 97-Chu-Su-2 Criminal Decision of the Hsinchu District Court of Taiwan.
[12] See the 99-Jin-Shang-Su-33 Criminal Decision of the Taiwan High Court.
[13] See the 102-Tai-Shang-1672 Criminal Decision of the Supreme Court.
[14] See the 102-Zhong-Jin-Shang-Geng-(1)-4 Criminal Decision of the Taiwan High Court.
[15] See the 104-Tai-Shang-78 Criminal Decision of the Supreme Court.
[16] See the 96-Zhong-Su-132 Criminal Decision of the Taipei District Court of Taiwan, the 100-Jin-Shang-Zhong-Su 1 Criminal Decision of the Taiwan High Court, the 102-Tai-Shang-1420 Criminal Decision of the Supreme Court, the 102-Jin-Shang-Zhong-Geng-(1)-7 Criminal Decision of the Taiwan High Court, and the 104-Tai-Shang-3877 Criminal Decision of the Supreme Court.
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