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In the event that a public company meets the conditions of the Taipei Exchange Rules Governing Review of Securities Traded on the TPEx (the "Rules") but one of the below-listed circumstances exists and the Taipei Exchange (the "TPEx") deems its stock unsuitable for trading on TPEx, the TPEx has discretionary authority to disapprove TPEx trading of its stock unless the circumstances set forth under sections "7." through "9." obtain, in which case it is mandatory that the TPEx shall not agree to the trading of its stock on TPEx:
- Any of the events in Article 156, paragraph 1, subparagraphs 1 through 3, of the Securities and Exchange Act. Determination standards: an event under Article 156, paragraph 1, subparagraphs 1 through 3 of the Securities and Exchange Act:
- The issuer of the securities becomes involved in litigious or non-litigious matters that are sufficient to result in dissolution, or change in corporate organization, capital, business plan, financial condition, or suspension of production, where there results a danger of affecting the market order or impairing the public interest.
- The issuer of the securities encounters significant disasters, enters into important agreements, is confronted with special circumstances, or initiates major changes in its business plan, or has a check dishonored, the result of which is sufficient to cause major changes in the financial condition of the company, thus creating a danger of affecting the market order or impairing the public interest.
- The issuer of the securities engages in deceptive, dishonest, or illegal practices, the result of which is sufficient to affect the prices of its securities, thus creating a danger of affecting the market order or impairing the public interest.
- Where the finance or business of the public company cannot be differentiated independently from those of others..
Determination standards:
- An excessive share of the applicant company's funds comes from non-financial institutions.
- The applicant has entered into contracts that materially limit its operations or that are obviously unreasonable such that there arises the likelihood of adverse impact upon the company.
- The applicant company jointly shares a line of credit with another party in which its own credit use cannot be clearly distinguished, provided that this restriction shall not apply to the sharing of a credit line between a parent company and its subsidiary of a credit line.
- During the fiscal year of application for TPEx listing and during the most recent fiscal year, more than 70 percent of the applicant company’s purchase amount comes from any related party(ies) not falling in the category of a company(ies) within the same group enterprise as the applicant company. However, this shall not apply where such event results from industry characteristics, market demand and supply conditions, government policy, or any other reasonable cause.
- During the fiscal year of application for TPEx listing and during the most recent fiscal year, more than 50 percent of the applicant company's operating revenue or operating profit comes from any related party(ies) not falling in the category of a company(ies) within the same group enterprise as the applicant company; or more than 50 percent of the applicant company's operating revenue is derived by utilizing key technologies or assets of such related party(ies). However, this shall not apply where such event results from industry characteristics, market demand and supply conditions, government policy, or any other reasonable cause, and the aforesaid ratio furthermore does not exceed 70 percent.
- Where a significant labor dispute or environmental pollution has occurred and no rectification has been made.
Determination standards:
- The term "major labor dispute" means any of the following conditions that is sufficient to affect the normal financial and business operations of the company:
- The occurrence of a serious labor dispute.
- Occurrence of a serious workplace accident due to inadequate safety or health facilities, rendering of a disposition for violation of the Occupational Safety and Health Act requiring the company to suspend its operations in part or in whole, or installation of dangerous machinery or facilities that fail inspection, during the most recent 3-year period; provided, this shall not apply where through application the same passes re-inspection conducted by the inspection agency.
- Being in arrears in the payment of labor insurance premiums and default penalties, where not cured after legal recourse is duly taken.
- The term "major environmental pollution issue" means any of the following circumstances with respect to the company or its business activity-related venues, that is sufficient to affect the normal financial and business operations of the company:
- Failure to obtain permits required by law for [pollution] discharge or installation or operation [of pollution control equipment].
- A pollution event occurring during the fiscal year of application for TPEx listing or during the most recent 2 fiscal years, in which the environmental protection authority has imposed penalties accruing on a daily basis, or required rectification within a prescribed time limit, and no rectification has been made accordingly.
- Involvement in an event of public nuisance dispute where the company has no effective pollution control facilities, or failure to provide records of normal operation and regular maintenance of pollution prevention equipment.
- A pollution event in which the competent authority has ordered the company to stop work or to suspend or terminate its operations, or has revoked its pollution-related permit.
- Careless disposal of waste materials, or failure to store, clean up, or process such materials in accordance with regulations, or occurrence of a serious pollution event during the treatment process for such materials, causing casualty, serious physical injury, harm to health, or illness.
- Designation, through public notice by a competent authority of the Soil and Groundwater Pollution Remediation Act, of the company's land as a controlled site or a site under remediation due to soil or underground water pollution. However, this shall not apply if the pollution control plan or investigation and assessment plan have been approved by the environmental protection authorities, the remediation fees have been recognized in accordance with generally accepted accounting principles, and furthermore there is no material effect on operations.
- Manufacturing, processing, or importation by the company of banned or counterfeit environmental agents, for which its responsible person is convicted of the violation by a final and unappealable judgment.
- The phrase "no rectification has been made" means the continuance of the above events after the TPEx accepts and handles the company's application for TPEx listing..
However, with respect to a serious environmental pollution event as referred to in (2)(ii), the criteria for determining whether rectification has been made shall be that the company has requested inspection and testing by an agency authorized by the environmental authority, that the agency has prepared a report on the inspection, by which the company submits a report to the environmental authority of completion of rectification procedures, and that the company receives no further penalty within 3 months thereafter.
- Where a significant trading irregularity has occurred and no rectification has been made as of the time of application..
Determination standards:
- Where the purpose, prices, or terms and conditions with respect to, or the occurrence of, or the substantive nature and form of, or the handling procedures for a purchase or sale of goods are at variance with those of an ordinary transaction or are obviously unreasonable.
- Where, in regard to a transaction for acquisition or disposal of assets that must be publicly announced and reported under the Regulations Governing the Acquisition and Disposal of Assets by Public Companies prescribed by the securities authority, the company fails to reasonably demonstrate the legality of its internal decision-making process, the necessity of the transaction, the sufficiency of its disclosure of financial statements, or the reasonableness of the price and the payment/collection of monies.
- Occurrence of any of the following events with regard to real estate transactions during the most recent 5 years, with the contract execution date as the determination basis:
- A real estate purchase from a related party in violation of the provisions regarding determination standards for trading irregularities of the Regulations Governing the Acquisition and Disposal of Assets by Public Companies prescribed by the securities authority.
- A sale of real estate to a related party in which the selling price is lower than the cost of the real estate as computed, based whether upon imputed calculation or upon assessment, in accordance with the methods given under the standards for determining the existence of irregularities in real estate transactions under the Regulations Governing the Acquisition and Disposal of Assets by Public Companies.
- A purchase or sale of real estate with a related party in which the terms of payment are at obvious variance with those of ordinary real estate transactions, for which there is no legitimate reason.
- The applicant company purchases or sells a piece of land at or for a price at obvious variance with that at or for which a related party purchase or sells a piece of land in an adjacent area at period near in time, where there is no legitimate reason.
- The operating revenue from sales of products or leasing of real estate to a related party in the final quarters of the most recent 5 fiscal years exceed 20 percent of the yearly operating revenue, where there is no legitimate reason.
- Purchase of real estate from, or sale to a related party at obvious variance with ordinary real estate transactions, as demonstrated by relevant evidence, where there is no legitimate reason..
The provisions regarding the purchase or sale of real estate involving a related party shall apply where either of the two prior owners has been a related party in the most recent 5 years; provided that such transaction may be exempted from the provisions regarding the standards for trading irregularities prescribed by the securities authority where the period from the date on which the trading counterpart was to acquire the property under the contract to the contract execution date for the present transaction exceeds 5 years.
- Where a large amount in financing has been extended to another person during the most recent year for purposes other than financing needs arising from business transactions between the companies. The term "a large amount" immediately above means the financing at its greatest point in the given fiscal year reaches 10 percent [or more] of the company's capital stock at the time of the loan or NT$10 million or more.
- A determination that rectification has been made with respect to the phrase "no rectification has been made" shall be based upon any of the following circumstances:
- Where a person other than the applicant company profits from the trading irregularity, the receiving person has returned such profit to the person entitled to it.
- Where the applicant company profits from the trading irregularity, and where after deduction of such profit though an imputed calculation the company still meets the TPEx listing requirements for profitability.
- Where an investigating or judicial agency has determined that the trading irregularity does not constitute a criminal offense.
- The trading irregularity has been restored to normal status.
- The above provisions shall not apply to a public enterprise that acts in response to government policies or that has taken measures pursuant to the Government Procurement Act.
- Where after consolidating the new shares from capital increase already issued or being issued in the fiscal year of the application for TPEx listing into the capital stock stated on the financial report of the most recent fiscal year, the profitability does not meet the requirements for TPEx listing..
Determination standards:
- The term "the fiscal year of the application for TPEx listing" refers to the fiscal year of the examination period starting from the TPEx's receipt and handling of the application for TPEx listing to the approval of the board of directors of the TPEx.
- The term "already issued" means a situation where a letter of approval has been received indicating that the Ministry of Economic Affairs has granted its approval of the company's application for amendment registration, with the date on the letter of approval being taken as the determination basis; the term "in process" means a situation where the application has been filed with the securities authority and accepted for processing, but the letter of approval has not yet been received. The term "in process" also applies to a cash capital increase involving public sale carried out for the purpose of a planned TPEx listing.
- The term "new shares from capital increase" refers generally to new shares issued for cash capital increase, for capital increase in a corporate merger, for capital increase converted from earnings, and for capital increase converted from capital reserves.
- The term "the profitability of the company does not meet the requirements for TPEx listing" means a situation where the company fails to meet the TPEx listing requirements in its profitability obtained after back calculation.
- Where financial reports are not prepared in accordance with applicable acts and regulations and generally accepted accounting principles, or to a serious extent the internal control, internal auditing, and written accounting systems are not soundly established or effectively operating..
Determination standards:
- The term "financial reports are not prepared in accordance with applicable acts and regulations and generally accepted accounting principles" means any of the following circumstances:.
- Where a financial report is not prepared in accordance with applicable acts and regulations and generally accepted accounting principles, and the CPA issues an audit report containing an adverse opinion or disclaimer of opinion, or the CPA issues an audit report containing a qualified opinion affecting the fair presentation of the financial report;
- Where the competent authority notifies the company by letter to rectify its financial reports and the company fails to do so; or
- Where the TPEx reviews by requisition the audit working papers of the CPA and discovers significant defects therein, so it is impossible to determine whether the financial reports are a fair presentation.
- The expression that "the internal control, internal auditing, and written accounting systems are not soundly established or effectively operating" means either of the following circumstances:
- Where during the year in which the application for TPEx listing is filed the company fails to establish sound internal control, internal auditing, and written accounting systems in conformity with the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry or with laws and regulations related to internal control; or
- Where the TPEx carries out on-site supervision and finds that the company fails to operate reasonably under its internal control, internal auditing, and written accounting systems.
- Where the company or any director, the general manager, or the actual responsible person at the time of application has committed any act in violation of the principle of good faith during the most recent 3 years.
- The term "during the most recent 3 years" refers to the 3-year period starting from the date on which the TPEx receives and handles the company's application for TPEx listing.
- The term "act in violation of the principle of good faith" means any of the following circumstances:
- With respect to the company:
- The bills clearing house announces that a checking account opened by the applicant company has been declined, or that a check or any other negotiable instrument issued by the company with a financial institution as the paying agent was dishonored due to insufficient deposit, as included in the record, and the company has not completed remedial procedures and submitted documentary evidence thereof under Article 12, paragraph 4 of the Taipei Exchange Rules Governing Securities Trading on the TPEx.
- The company has been in arrears in the repayment of any loan extended to it by a financial institution.
- A final and unappealable judgment has found the company in violation of the Labor Standards Act, provided that where during the most recent year the company has not been subject to an administrative penalty or other disciplinary measure of a higher degree by the competent authority in charge of labor affairs, or been convicted by a court of any criminal offense.
- A final and unappealable judgment has found the company in violation of the Tax Collection Act.
- The company breaches the warranties and representations made upon application for TPEx listing.
- The company commits other serious malpractice such as fraudulent or misleading representation or suffers loss of credit, thereby causing damage to the interests of the company, the rights and interests of its shareholders, or the public interest.
- With respect to the directors, the general manager, or the actual responsible person:
- Any of the circumstances set forth in subparagraphs 1 though 5 of the preceding paragraph. Being in arrears in repayment of a loan from a financial institution, however, shall not be deemed an "act in violation of the principle of good faith" where the delay of repayment is not material or there are reasonable mitigating factors.
- Commission of a crime set forth under the Company Act, Banking Act, Insurance Act, Financial Holding Company Act, Securities and Exchange Act, Futures Trading Act, Commercial Accounting Act, Act Governing Bills Finance Business, or other commercial legislation, or of the crime of corruption, malfeasance in office, fraud, breach of fiduciary duty, or embezzlement, for which a sentence of imprisonment for a fixed period or more severe criminal penalty was handed down by a court judgment.
- Business malpractice such as suspected fraudulent bankruptcy of, or material violation of the principles of corporate governance of, another company operated by the applicant company.
- Where the board of directors of the applicant company is unable to independently perform its duties..
Determination standards:
- The applicant company shall have at least five members on the board of directors, of which the number of independent directors may not be fewer than three and may not be fewer than one-fifth of the total number of directors.
- More than one-half of the directors of the applicant company shall mutually be free of any of the relationships listed below, provided that those approved by the competent authority with the relevant jurisdiction are not subject to the provision of item c:
- Spouse;
- Relative within the second degree of kinship;
- Representative of the same juristic person.
Representatives of the same juristic person include representatives appointed by the government, by juristic person shareholders, or by entities with a controlling or subsidiary relationship therewith (including incorporated foundations and incorporated associations).
- Prerequisites to serve as an independent director:
- Meeting the procedural and prerequisite requirements set forth in the Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies.
- The independent directors shall include at least one professional in accounting or finance.
- Having pursued continuing education every year (counting from the day on which their recommending securities firm entered into an advisory contract with the company) for at least 3 hours in legal affairs, finance, or accounting and obtained certification documents issued from any of the continuing education systems under Article 6, subparagraphs 1, 2, and 4 of the Directions for the Implementation of Continuing Education for Directors and Supervisors of TWSE Listed and TPEx Listed Companies.
- Where the applicant company has been registered for trading as an emerging stock on the TPEx in the fiscal year of the application and the most recent fiscal year thereto, and there has been, from the registration date onward, any trading of stock issued by the applicant company by any incumbent director or shareholder holding more than 10 percent of its total issued and outstanding shares other than on the emerging stock market; provided, this restriction shall not apply where such trading is for purposes of underwriting under Article 4 of the Rules or for other legitimate reason..
Determination standards:
- The term "director or shareholder holding more than 10 percent of its total issued and outstanding shares" means the person himself or herself.
- The term "underwriting under Article 4" includes underwriting, arrangement for subscription by specific persons after underwriting, or subscription by the underwriting securities firm itself.
- Where shares of the applicant company are held by a TPEx or TWSE listed company and furthermore any of the conditions listed below is met, and during the 3-year period before the application for TPEx listing, the TPEx or TWSE listed company, when taking any action to disperse its equity ownership in order to reduce its shareholding percentage in the applicant company, has failed to do so in a manner giving pre-emptive subscription rights to the existing shareholders of the TPEx or TWSE listed company or other manner not detrimental to the rights and interests of the shareholders of the TPEx or TWSE listed company:
- The applicant company is a transferee company of a demerger conducted by the TPEx or TWSE listed company.
- The applicant company is a subsidiary of the TPEx or TWSE listed company, and during the 3-year period before the application for TPEx listing, the TPEx or TWSE listed company has cumulatively reduced its shareholding percentage in the applicant company, including direct and indirect shareholding, by 20 percent or more.
Determination standards:
- "During the 3-year period before the application for TPEx listing" means the 3-year period before the day on which the TPEx receives the application documents from the company applying for TPEx listing.
- "Taking any action to disperse its equity ownership in order to reduce its shareholding percentage in the applicant company" means any dispersion of equity ownership by the TPEx or TWSE listed company in order to reduce its shareholding percentage in the applicant company, including any disposal of shareholdings in the applicant company or any waiver of rights to priority subscription to new shares issued by the applicant company for cash capital increase based on the original shareholding ratio.
- "Detrimental to the rights and interests of the shareholders of the TPEx or TWSE listed company" means that in a dispersion of equity ownership as mentioned in the preceding item, the parties to which equity ownership is dispersed or the price determination method for the dispersion violate relevant regulations, or are clearly unreasonable and detrimental to the rights and interests of the shareholders of theTPEx or TWSE listed company. The parties to which equity ownership is dispersed include assignees of disposed shareholding and specified persons determined following a waiver of rights to priority subscription to new shares issued for a cash capital increase. The price of equity ownership dispersion includes the disposal price and the price of the cash capital increase. "Violate relevant regulations means violation of the Company Act, Securities and Exchange Act, Article 8-1 or Chapter II-1, Section IV of the Taipei Exchange Rules Governing Securities Trading on the TPEx, or Article 48-2 or Chapter IV-1 of the Operating Rules of the Taiwan Stock Exchange Corporation. "Clearly unreasonable" means there is a likelihood of improper profit to specified persons..
- "A transferee company of a demerger conducted by the TPEx or TWSE listed company" means a newly incorporated transferee company or an existing transferee company of a demerger conducted in accordance with Article 15-23 or 15-24 of the Taipei Exchange Rules Governing Securities Trading on the TPEx, or Article 53-22 or 53-23 of the Operating Rules of the Taiwan Stock Exchange Corporation.
- Where there is serious deterioration in the business it operates..
Determination Standards:
If any of the following circumstances occurs to the applicant company, the TPEx may determine there to be serious deterioration in the business it operates; however, this does not apply if on the applicant company's financial report for the most recent fiscal year the ratio of net income before tax excluding net income (or loss) from non-controlling interests to the amount of equity attributable to owners of the parent company is 6 percent or more:
- Operating revenue and operating income for the most recent fiscal year or the fiscal year in which the application for TPEx listing is filed show a significant deterioration relative to other enterprises in the same industry.
- Net income before tax for the most recent fiscal year or the fiscal year in which the application for TPEx listing is filed show a significant deterioration relative to other enterprises in the same industry.
- There is continuing negative growth in operating revenue and operating income for each of the 3 most recent fiscal years.
- There is continuing negative growth in net income before tax for each of the 3 most recent fiscal years.
- The company's products or technology are outdated, and it has no plan for improvement.
The subparagraphs of the preceding paragraph need not apply if the applicant company is applying for TPEx listing under the "net worth, operating revenue, and cash flow from operating activities" standard in Article 3, paragraph 1, subparagraph 2 of the Rules or under Article 3, paragraph 4 of the Rules, and has submitted a statement explaining the reasonableness
For the "other enterprises in the same industry" in paragraph 1, subparagraphs 1 and 2, the recommending securities firm shall evaluate and explain the reasonableness of the enterprises sampled for the comparison.
The provisions of subparagraphs 3 and 4 of paragraph 1 do not apply to a company that already has a concrete improvement plan that is producing positive effects.
- Where the TPEx deems listing of its stock on TPEx inappropriate due to the scope or nature of its business or in other special conditions.
Note: The term "related party" as used herein is defined in accordance with Article 18 of the Regulations Governing the Preparation of Financial Reports by Securities Issuers. However, if the regulations issued by the competent authority to govern the preparation of financial reports for another specific industry provide otherwise, those regulations shall govern.
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