The Supreme Court rendered the 106-Tai-Shang-2513 Civil Decision of November 28, 2018 (hereinafter, the “Decision”), holding that if the share price of a publicly offered company falls after false financial report information is disclosed, the investors will sustain losses due to share price depreciation, and this has nothing to do with whether the company actually has sustained any damage or if its financial reports are re-prepared.
The Appellant in this matter asserted as follows. The Appellees were all directors and supervisors of a publicly offered company (hereinafter, the “Company at Issue”). As a result of borrowings disguised as transactions and falsified input sale without disclosing transactions with related parties as they actually took place, the company’s financial report at issue (hereinafter, the “Financial Report at Issue”) became false. The Appellants, who were investors, relied on the Financial Report at Issue and purchased shares of the Company at Issue in good faith. After the prosecutors issued the indictment against the Appellees for criminal facts including violation of the Securities and Exchange Law (hereinafter, the “Criminal Case at Issue”) and disclosed the falsehood of the Financial Reports at Issue, the share prices plummeted. The Appellants, who were investors, subsequently sustained losses when selling their shares or holding on to the shares after the drop in share prices, and the Securities and Futures Investors Protection Center brought an action for damages. The Appellants appealed after the original trial court had rendered a decision against them.
According to the Decision, the financial reports of the Company at issue serve as the major reference and basis for investors’ investment in its securities. If there is anything false in the financial reports to an extent sufficient to affect the investors’ judgment, the investors will be damaged for share price depreciation if share prices fall after the false information is disclosed. This has nothing to do with whether the company has actually incurred any damage or whether its financial report is re-prepared.
The original trial court held in this matter that there were a total of 11 false transactions between the Company at Issue and other companies which were not parties to this lawsuit with false accounting vouchers prepared on such basis and with falsely added input and output amounts in excess of NT$800 million, resulting in falsehood in the contents of the Financial Report at issue. In addition, when the indictment was issued for the Criminal Case at Issue, the share prices of the stock of the Company at Issue did fall after falsehood in its financial reports was disclosed.
According to the Decision, the above facts recognized by the original trial court, which pertain to the above falsehood in the Financial Report at Issue, are closely connected with the operating status and revenues of the Company at Issue. Therefore, it would appear difficult not to conclude that they were insufficient to affect the investment judgment of investors. In light of this, when the prices of the stock at issue purchased by the investors after the Financial Report at Issue was released fell as the false information was disclosed, it is not without question if it can be concluded that the investors did not sustain any price depreciation damage due to the decline of share prices. Failing to explore this in depth, the original trial court was at fault when jumping to the conclusion that the investors were not injured simply on the ground that the shareholders had still appeared to have enjoyed gains without any damage, and that the competent authority had not requested the re-reparation of the Financial Report at Issue.
It was further pointed out in this Decision that there were many and complex reasons for share price decline, e.g., illegal acts of operators such as concealment and embezzlement and market factors. However, falsehood in the financial reports, if any, should not be excluded as a factor. The criminal facts set forth in the prosecutors’ indictment did include falsehood in financial reporting. Therefore, it is not true if there is no room to conclude that there is no connection between the price depreciation of the stock at issue and the falsehood in the Financial Report at Issue. The original trial court also failed to consider this but instead jumped to the conclusion that the price decline, if any, of the stock at issue was caused by the investors’ concern about the directors’ embezzlement of the company’s funds and had nothing to do with the falsehood in the Financial Report at Issue. Since the original trial court was found reckless, the original decision was reversed and remanded.