September 2022
Aaron Chen and Weke Chen
Pursuant to Article 157, Paragraph 1 and Article 62, Paragraph 3 of the Securities and Exchange Act, the profits realized by an insider of a listed, OTC or emerging stocks company from short-swing trading of the company’s shares shall be disgorged and returned to the company. The specific wording is: “If a director, supervisor, managerial officer or a shareholder holding over 10% of the shares issued by a company acquires publicly-traded shares of the company and profits either from their sale within six months or subsequent purchase after their sale within six months, the company may claim the disgorgement of such profits to return them to the company.”
The Financial Supervisory Commission (the “FSC”) issued the Jin-Guan-Zheng-Jiao-Zi-1110382481 Circular on July 12, 2022 (the “Circular”) to clarify issues regarding short-swing trading in practice. The key points are highlighted below:
1. When determining profits, there has been confusion and debate over whether the entity must be an insider both at the time of purchase and at the time of sale. As the Circular explicitly excludes shares purchased before becoming an insider and shares sold after losing insider status, the scope of short-swing trading is limited to those with insider status both at the time of purchase and at the time of sale.
2. With respect to defining an “acquisition” of shares, this Circular specifically includes: (1) shares acquired through gifting; (2) shares acquired by a securities underwriter through underwriting the company’s shares after previously becoming an insider (e.g., a director) of the company via holding the shares of the company in trust; and (3) shares of a formerly state-owned company acquired by its manager through preemptive subscription according to the Rules of Preemptive Rights to the Employees upon the Privatization of State-owned Enterprises at the time those shares are issued pursuant to the Statute of Privatization of Government-Owned Enterprises. (Please note that the FSC had ruled in the Jin-Guan-Zheng-3-Zi-0960048145 Circular dated October 26, 2007 that shares acquired through inheritance is not considered an “acquisition” in this context)
3. With respect to defining what constitutes a “sale”, when a financial institution exercises its pledge rights over pledged shares, including a sale by way of auction or application to the court for compulsory execution, it is considered a sale of those shares on behalf of the debtor-pledgee, hence a “sale” by the pledgee. However, on the flip side, if the directors or supervisors of a company are forced to acquire shares to meet the minimum shareholding thresholds after the shares pledged by other directors or supervisors have been compulsorily sold by a financial institution (i.e., forced liquidation) or lost via any other circumstance that could not be attributed to the directors or supervisors forced to make the share purchases at issue, such forced purchases shall not be considered a “purchase” in the short-term swing trading context.