The Supreme Court rendered the 108-Tai-Shang-1547 Decision of July 25, 2019 (hereinafter, the “Decision”), holding that whether false information in financial documents meets the “materiality” criteria under the Securities and Exchange Law should be comprehensively determined by “quantitative indicators” and “qualitative indicators” under the core concept that reasonable investors may substantially change their investment decisions.
According to the facts underlying this Decision, the Defendant, the President and General Manager of Company A, set up three offshore paper companies (hereinafter, the “Offshore Companies at Issue”) in the names of his friends and relatives. Since the Defendant had actual control over the operation and finance of the Offshore Companies at Issue, the Offshore Companies at Issue should be the “actual related parties that should be disclosed” in relation to Company A under Article 16 of the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the Statement of Financial Accounting Standard No. 6. However, the Offshore Companies at Issue were indicated as “non-related parties” in Company A’s financial statements. Therefore, the Defendant misrepresented the related party transactions part in Company A’s financial statements.
According to the Decision, Article 20, Paragraph 2 of the Securities and Exchange Law provides: “The financial reports or any other relevant financial or business documents filed or publicly disclosed by an issuer in accordance with this Law shall contain no misrepresentations or concealments.” The “contents” that should not be misrepresented or concealed refer to the conveyance or concealment of certain information which has an important influence on the investment decisions of general reasonable investors. In reference to Article 20-1 of the same law, based on purposive and systematic interpretation, along with a comparative law perspective, currently it is academically and practically held that this requirement is limited to “materiality.” To wit, this is limited to the misrepresentation or concealment of major details about relevant information to an extent sufficient to cause damage to reasonable investors.
Although the law is silent on the determination criteria for the “materiality” principle, “quantitative indicators” have been developed in practice by interpreting current laws and regulations, e.g., “purchase from or sale to related parties in an amount of no less than NT$100 million or equivalent to at least 20% of the paid-in capital,” under Article 17, Subparagraph 1:(7) of the Financial Reporting Standards, and “accounts receivable from related parties reaching NT$100 million or exceeding 20% of the paid-in capital” under Article 17, Subparagraph 1: (8) of the Financial Reporting Standards. In addition, “qualitative indicators” in practice have also been developed in reference to factors enumerated under Staff Accounting Bulletin No. 99 released by the US Securities Exchange Commission such as whether a misrepresentation covers up gains or other trends or turns a loss to a gain (or a gain to a loss), affects an issuer’s compliance with laws and regulations, lending contracts or other contractual requirements, and whether the compensation to the management should be increased. Such “qualitative indicators” are not simply determined by the “trading amount” between related parties, but also include “qualitative factors” for general determination, such as whether a company’s management has subjective criminal intent such as “malfeasance” or “illegal behavior” or whether the nature of the behavior is sufficient to “cover up revenue trends,” “affect performance or debt repayment capabilities” or “undermine legal compliance.”
It was further indicated in this Decision that the “materiality” concept should be determined comprehensively based on “quantitative indicators” and “qualitative indicators” under the core concept that reasonable investors may substantially change their investment decisions. As long as one indicator is met, this is material information that should be disclosed, and it is not necessary to satisfy both indicators. If there is objectively no “materiality,” it is not necessary to impose any criminal punishment in order to meet the principle of restraint and last resort under criminal law.
Since there is no sufficient evidence to prove that Company A’s failure to disclose transactions with related parties is subject to the circumstance where the amount of annual purchase or sale of goods or the accounts receivable from related parties reach NT$100 million or exceed 20% of the paid-in capital, such concealment and misrepresentation does not satisfy the “materiality” criteria according to an analysis based on “quantitative factors” pursuant to the quantification requirements under the laws and regulations effective at the time. In addition, the facts associated with the transactions between Company A and the Offshore Companies at Issue and the balance of relevant accounts as disclosed in the financial reports and balance sheets are both “actual” and without “concealment.” Further, the evidence in the court files does not lend itself to the conclusion that the management (including the Defendant) of Company A had any subjective criminal intent to engage in “malfeasance” or “illegal behavior.” The contents of the financial reports do not satisfy “qualitative factors” such as “affecting performance or debt repayment capability” and “affecting legal compliance,” either. Therefore, from the perspective of “qualitative indicators,” this is not sufficient to impair a reasonable investor’s investment judgment and hardly satisfies the “materiality” requirement. Under the principle that “dubious criminal evidence should be weighed in favor of the defendant,” it was concluded in the original decision that the Defendant’s failure to disclose transactions with interested parties in Company A’s financial reports is not “material” and culpable. Therefore, the high court’s decision to reverse the portion of the first instance decision that imposed a criminal penalty, ruling that the Defendant should be acquitted is upheld.