Pei-Ching Ji and Tina Lee
Established in July 2021, the Commercial Court under the Intellectual Property and Commercial Court seeks to expeditiously, appropriately and professionally handle the important commercial disputes (for other highlights of the Commercial Case Adjudication Act concerning the regulation of the Commercial Court, please refer to Lee, Tsai & Partners Newsletter from July, 2020, titled Introduction of Major Changes to the Commercial Matter Adjudication Law (Taiwan)). According to the statistics of the Judicial Yuan, the Commercial Court has accepted 91 commercial cases since its establishment, and given that the Commercial Court adopts the principle of mediation before litigation, pending lawsuits still account for around ten percent. The 110-Shang-Su-1 Civil Decision of August 18, 2022 rendered by the Intellectual Property and Commercial Court (hereinafter, the “Decision”) was its first substantive decision since the inception of the Commercial Court. The facts and highlights of this Decision are summarized below:
I. Case facts
A director and a secretary of a well-known semiconductor company, who had been involved in a tender offer project of the company and learned about information that would have a major impact on the share prices of the two companies during the discharge of their job duties disclosed the information to their friends and relatives and separately purchased the shares of the two companies on their own or in the name of others before the information was made public. The general investors, unaware of the material information, sold the shares instead before the information became precise and was made public, resulting in their losses. The investors jointly selected the Securities and Futures Investors Protection Center (hereinafter, “Center”) to file a class action lawsuit seeking damages from four individuals, namely, the director and secretary of the well-known semiconductor company and their friends or relatives.
II. Civil liability for insider trading is not constrained by criminal acquittal
In July 2017, the prosecutors of the Kaohsiung District Prosecutors Office prosecuted four individuals, namely, the director and secretary of the well-known semiconductor company and their friends and relatives, for violation of the Securities and Exchange Act (hereinafter, the “Act”) before the Kaohsiung District Court of Taiwan in July 2017 for reasons and facts identical to those of this Decision. After a trial procedure of some two years and a half, the Kaohsiung District Court of Taiwan handed down the 109-Jin-Shang-Su-23 Decision of February 2020 (hereinafter, the “Criminal Decision”), acquitting the four individuals. After an appeal was filed to the second instance court, the Taiwan High Court Koahsiung Branch dismissed the appeal for procedural irregularities. After this case was remanded by the Supreme Court, this case is currently pending in the Taiwan High Court Kaohsiung Branch. The similarities and differences between the Criminal Decision and the Decision in findings are discussed below:
1. The determination as to the point in time when material information becomes precise
Under Article 157-1 of the Securities and Exchange Act, an act of insider trading is constituted by the circumstance where the Insiders” Upon actually knowing of any information that will have a material impact on the price of the securities of the issuing company, after the information is precise, and prior to the public disclosure of such information or within 18 hours after its public disclosure, to purchase or sell, in the person’s own name or in the name of another, shares of the company that are listed on an exchange or an over-the-counter market, or any other equity-type security of the company ”
In addition, the “scope of material information and the rules for the administration of the public release of such information under Article 157-1, Paragraphs 5 and 6 of the Securities and Exchange Act” adopts “multiple points in time and earlier dates” as the determination method. Therefore, the point in time as to when a company’s merger or acquisition procedure constitutes ” precise information” in reality affects the scope of determining if the timing of securities trading by a company’s insider falls within the determination scope of “insider trading.” This is not only a defensive keypoint in litigation but also accounts for the significant differences between the Decision and the Criminal Decisions in terms of their findings.
Since the Criminal Decision held that the requirements for the tender offer of fractional shares in Taiwan in the merger or acquisition procedure at issue contradict the Securities Act of the U.S., the court concluded that until the company obtains a waiver letter concerning such a risk from the Securities and Exchange Commission, it is difficult to implement the merger or acquisition procedure and merger or acquisition uncertainties still exist. Therefore, it is difficult to conclude that the information about the merger or acquisition case has become precise.
However, this Decision based its finding of the timing as to the “precision of the information” on the “material impact on the stock prices” or the “material impact on the investment decision of a regular investor,” holding that since it is not necessary to obtain the waiver letter before announcing the material information about the tender offer, whether the fractional share exemption application is approved is not sufficient to affect the release and disclosure of the material information about the launch of the acquiring company’s first internal procedure for the tender offer project. Therefore, the timing for concluding “the preciseness of the information” for the tender offer is moved to an earlier point in time, and the trading activities of the defendants during the period between the point in time when the information became precise and 18 hours after the public release of the information were all found to be insider trading.
2. Required communication of criminal intent between the tipper and the tippee of the information
The Act provides that those who are jointly alleged to have violated Article 157-1 should have communicated their criminal intent. Therefore, it was held in the Criminal Decision that since the prosecution failed to submit clear evidence that shows that the share transactions among the defendants were indeed conducted based on the insider information provided by the company’s insider, the four defendants were acquitted.
In the Decision, however, the Center relied on the provisions of Article 184, Paragraph 2 and Article 185 of the Civil Code to claim damages from the director and secretary of the well-known semiconductor company and their friends and relatives for the damage inflicted upon the investors and arising from their joint violation of the Securities and Exchange Act, a law that protects investors. In this Decision, it was concluded that since Article 157-1, Paragraph 3 only reduces the burden of proof of a victim and does not rule out the joint and several liability for a joint tort under Article 185 of the Civil Code, the communication of criminal intent among the joint defendants in this case is not required, and that the joint defendants shall assume joint and several liability in accordance with Article 185, Paragraph 1 of the Civil Code as long as they engaged in insider trading acts on the same date, which is a cause of damage suffered by the investors.
III. More expeditious trial process relative to ordinary litigation proceedings
The Decision pertains to a lawsuit filed by the Center as late as July 2, 2021 and was handed down by the Commercial Court as early as August 18, 2022, in contrast to the Criminal Decision, which pertains to a case in which the first instance decision was not obtained until two and a half years after its filing, and which is subject to a remanded trial procedure. This shows that the Commercial Court is indeed conducive to expeditious, proper, and professional resolution of major commercial disputes.
Based on the foregoing, the 110-Shang-Su-1 Civil Decision not only attests to the efficiency of the Commercial Court but also indicates that the civil damages portion for the insider trading in that case is not bound by the acquittal criminal decision rendered by an ordinary court in the earlier case and concluded that the semiconductor company should pay the investors NT$48 million as compensation. This also shows that the establishment and operation of the Commercial Court indeed contribute to the protection of investors’ rights and interests and the development of the capital market. Another noteworthy point is that since May 17, 2022, the threshold for commercial litigation at the Commercial Court has been lowered from $100 million to $30 million in terms of the amount or value of the litigation subject matter. It is expected that the number of cases handled by the Commercial Court will continue to increase, and the subsequent development is also worthy of continued attention.
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