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In the event that a public company meets the requirements/conditions of the GreTai Securities Market Criteria Governing Review of Securities Traded on Over-the-Counter Markets (the "Criteria") but any of the below-listed circumstances exists and the GreTai Securities Market (the "GreTai") deems its stock is unsuitable for trading on over-the-counter (OTC) markets, the GreTai may disapprove OTC trading of its stock:
1. 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:
(1) 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.
(2) 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.
(3) 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.
2. Where the public company has merged with another company in the most recent fiscal year; provided, this shall not apply if both the surviving company and the absorbed company each met the profitability requirements for OTC listing before the merger.
Determination standards:
(1) The term "most recent fiscal year" means the fiscal year prior to the year of the date on which the GreTai receives such application for OTC listing.
(2) The term "profitability" as used in the above proviso refers to the standards under Article 3, paragraph 1, subparagraph 2 of the Criteria. Operating income and income before tax for the period commencing from the first day of the fiscal year in which the record date of the merger actually falls to the record date of the merger, shall be considered on the basis of an annualized figure converted pro-rata based on the number of business days during that period.
3. Where the finance or business of the public company cannot be differentiated independently from those of others.
Determination standards:
(1) The operational, financial, and business relationships between the applicant company and any specified company or institution shall meet the requirements of each of the subparagraphs of paragraph (2). The term "specified company" or institution as used herein means one where any of the following circumstances has existed during the fiscal year in which the application for OTC listing is filed and during the immediately preceding fiscal year:
(i) The company holds between 20 percent or more but not more than 50 percent of the total outstanding shares in the applicant company.
(ii) The aggregate total of the shares held by the company and its directors, supervisors, and shareholders with shareholding of more than 10 percent, amounts to 30 percent or more of the total outstanding shares of the applicant company, and there is a record of financial or operational transactions between the two companies; the computation of the shareholdings of the above persons shall include shares held by the spouses and minor children, and shares held under the names of others.
(iii) 30 percent or more of the operating revenue of the applicant company comes from the given company and its affiliate(s).
(iv) 50 percent or more of the total volume or total cost of procurement of principal materials (those that account for 30 percent or more of total procurement costs, and are indispensable key materials in product manufacturing) and principal products (those accounting for 30 percent or more of total operating revenue) comes from the given company and its affiliate(s).
(v) 50 percent or more of the applicant company's total procurement costs come from the given company and its affiliate(s).
(2) The following conditions shall be satisfied for the operational, financial, and business relationships between the applicant company and a single specified company or institution:
(i) Upon application for OTC listing by the applicant company, one-half or more of its directors, and one or more supervisors, shall not concurrently be representatives, directors, supervisors, or shareholders with shareholding of more than 10 percent of the specified company or institution or of affiliate(s) thereof, or be related parties of the specified company or institution, unless the applicant company and the specified company are enterprises members of the same consortium.
(ii) The applicant company shall formulate concrete written rules to govern its financial and operational affairs relating to the specified company or institution and its affiliate(s), submit the rules for approval by its board of directors, and concretely and effectively implement the same; the applicant company shall also issue a written undertaking that all financial and operational interaction between it and the specified company takes place on an arms-length basis, and have the representation, to
gether with its significant business policies, fully disclosed in its prospectus.
(iii) There shall not be any irregularities when the aforesaid rules are compared with those for other companies in the same industry.
(iv) Not more than 50 percent of the applicant company's operating revenue shall come from the specified company or institution and its affiliate(s) during the most recent fiscal year and the fiscal year in which the application is filed; provided, operating revenue derived from a parent/subsidiary relationship shall not be counted.
(v) Not more than 70 percent of its principal materials, principal products, or total procurement amounts shall come from the specified company or institution and its affiliate(s) during the most recent fiscal year and the fiscal year in which application is filed, to avoid any potential risk of being over-concentrated in sourcing for procurement; provided, procurement amounts arising from a parent/subsidiary relationship shall not be counted.
(vi) If the conditions in sub-items 4 and 5 of this item are the necessary results of industry, market supply and demand, government policies, or other reasonable causes, such two sub-items may be deemed as non-applicable.
(3) The sources of the applicant company's funds are heavily concentrated in non-financial institutions.
(4) The applicant has entered into contracts that severely limit its operations or that are obviously unreasonable such that they create a danger of adverse influence on the company.
(5) The applicant company jointly share a line of credit with another in which its own credit use cannot be clearly distinguished.
4. Where a significant labor dispute or environmental pollution has occurred and no rectification has been made.
Determination standards:
(1) 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:
(i) The occurrence of a serious labor dispute.
(ii) Failure to make allocations to the employee welfare fund, to organize an employee welfare committee, or to duly make monthly allocations to the special account holding labor pension funds.
(iii) Occurrence of a serious workplace accident due to inadequate safety or health facilities, rendering of a disposition for violation of the Labor 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 three-year period; provided, this shall not apply where through application the same passes re-inspection conducted by the inspection agency.
(iv) Being in arrears in the payment of labor insurance premiums and default penalties, where not cured after legal recourse is duly taken.
(2) The term "major environmental pollution issue" means any of the following circumstances with respect to the company or its business activity-related venues:
(i) Failure to obtain permits required by law for [pollution] discharge or installation or operation [of pollution control equipment].
(ii) A pollution event occurring during the fiscal year of application for OTC listing or during the most recent two 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.
(iii) 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.
(iv) 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.
(v) 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.
(vi) Designation by the central competent authority through public notice of the company's land as a controlled site or a site under remediation due to soil or underground water pollution.
(vii) 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.
(3) The phrase "no rectification has been made" means the continuance of the above events after the GreTai accepts and handles the company's application for OTC 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 three
months thereafter.
5. Where a significant trading irregularity has occurred and no rectification has been made as of the time of application.
Determination standards:
(1) 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.
(2) Where, in regard to a transaction for acquisition or disposal of assets that must be publicly announced and reported under the Guidelines for Handling 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.
(3) Occurrence of any of the following events with regard to real estate transactions during the most recent five years, with the contract execution date as the determination basis:
(i) A real estate purchase from a related party in violation of the provisions regarding determination standards for trading irregularities of the Guidelines for the Purchase of Real Estate from Related Persons by Public Companies prescribed by the securities authority.
(ii) 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 Guidelines for the Purchase of Real Estate from Related Persons by Public Companies.
(iii) 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.
(iv) 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.
(v) The operating revenue from sales of products or leasing of real estate to a related party in the final quarters of the most recent five fiscal years exceed 20 percent of the yearly operating revenue, where there is no legitimate reason.
(vi) 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 five 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 five years.
(4) 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.
(5) 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:
(i) 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.
(ii) 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 OTC listing requirements for profitability.
(iii) Where an investigating or judicial agency has determined that the trading irregularity does not constitute a criminal offense.
(iv) The trading irregularity has been restored to normal status.
(6) 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 Act for Inspection Procedure Governing Construction Works and Procurement and Disposal of Properties.
6. Where after consolidating the new shares from capital increase already issued or being issued in the fiscal year of the application for OTC listing into the paid-in capital of the most recent fiscal year, the profitability does not meet the requirements for OTC listing.
Determination standards:
(1) The term "the fiscal year of the application for OTC listing" refers to the fiscal year of the examination period starting from the GreTai's receipt and handling of the application for OTC listing to the approval of the board of directors of the GreTai.
(2) The term "already issued" means a situation where the amended company license has been received after the Ministry of Economic Affairs grants its approval of the company's application for amendment registration, with the date of amendment on the amended license being taken as the determination basis; the term "in process" means a situation where the application has been filed with, and handled by the securities authority, but the amended company license has not yet been received.
(3) 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.
(4) The term "the profitability of the company does not meet the requirements for OTC listing" means a situation where the company fails to meet the OTC listing requirements in its profitability obtained after back calculation.
7. Where a loan is extended by a non-financial institution interest free or at an interest rate below the normal standard, and after imputing interest expenses, the profitability does not meet the OTC listing requirements.
Determination standards:
(1) The term "below the normal standard" means that a loan is extended at an interest rate below the prime lending rates of its major correspondent banks.
(2) The term "imputing interest expenses" means the imputed calculation of interest expense carried out based upon the short-term lending rates of the aforesaid major correspondent banks.
8. Where it is obvious that the company's operating status significantly declines.
Determination standards:
(1) The GreTai may deem the operating status of the public company as significantly declining in any of the following circumstances.
(i) Its operating revenue and operating income during the most recent fiscal year or during the fiscal year in which the application for OTC listing is filed show a significant decline relative to other enterprises in the same industry.
(ii) Its income before tax during the most recent fiscal year or during the fiscal year in which the application for OTC listing is filed show a significant decline relative to other enterprises in the same industry.
(iii) There is continuing negative growth in its operating revenue and operating income for each of the most recent three fiscal years.
(iv) There is continuing negative growth in its income before tax for each of the most recent three fiscal years.
(v) Its aggregate capital increases for the most recent two fiscal years amount to NT$600 million or more, or to 150 percent of its capital stock at the closing date of the third prior fiscal year, and the growth in its operating revenue during the most recent fiscal year fails to reach 60 percent of those during the third prior fiscal year or NT$300 million or more, and the earnings per share have been declining in each of the most recent two fiscal years, provided that compulsory capital increases u
nder compulsory provisions of government acts or regulations shall not be subject to these limitations.
(vi) Its products or technology are outdated, and it has no plan for improvement.
(2) The above item (1) shall not apply where the company's operating revenue and income before tax during the most recent fiscal year account to no less than 5 percent of its paid-in capital.
(3) The provisions of sub-items (iii) and (iv) under the above item (1) shall not apply where caused by the economic condition of the market and where there is an overall decline in the industry.
9. 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:
(1) 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:
(i) 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;
(ii) Where the competent authority notifies the company by letter to rectify its financial reports and the company fails to do so; or
(iii) Where the GreTai 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.
(2) 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:
(i) Where during the year in which the application for OTC listing is filed the company fails to establish a sound accounting system in writing in conformity with the Criteria Governing the Preparation of Financial Reports by Securities Issuers and the Criteria Governing the Preparation of Financial Reports by Securities Firms; or
(ii) Where the GreTai carries out on-site supervision and finds that the company fails to operate reasonably under its internal control, internal auditing, and written accounting systems.
10. Where the company or any director, supervisor, general manager, or actual responsible person at the time of application has committed any act in violation of the principle of good faith during the most recent three years.
(1) The term "during the most recent three years" refers to the three-year period starting from the date on which the GreTai receives and handles the company's application for OTC listing.
(2) The term "act in violation of the principle of good faith" means any of the following circumstances:
(i) With respect to the company:
(a) 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 GreTai Securities Market Rules Governing Securities Trading on Ov
er-the-Counter Markets.
(b) The company has been in arrears in the repayment of any loan extended to it by a financial institution.
(c) 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.
(d) A final and unappealable judgment has found the company in violation of the Tax Collection Act.
(e) The company breaches the warranties and representations made upon application for OTC listing.
(f) The company commits other serious malpractice such as fraudulent or misleading representation, violation of an act or regulation, or loss of credit, causing damage to the interests of the company, the rights and interests of its shareholders, or the public interest.
(ii) With respect to the directors, supervisors, general manager, or actual responsible person:
(a) Any of the circumstances set forth in subparagraphs 1 though 5 of the preceding paragraph.
(b) Commission of the crime of corruption, malfeasance in office, fraud, breach of trust, or misappropriation or other crimes under the Act Governing the Prohibition of Organized Crime, for which a fixed sentence or more severe criminal penalty was handed down by a final and unappealable judgment.
(c) Other business malpractice such as suspected fraudulent bankruptcy.
(d) Other serious violations of acts or regulations or the principle of good faith.
11. Where in the fiscal year of application or the previous fiscal year any director, supervisor, or shareholder holding more than 10 percent of the total shares has transferred a substantial number of shares.
Determination standards:
(1) The term "director, supervisor, or shareholder holding more than 10 percent of the total shares" shall include their spouses, minor children, and other persons in whose names they hold shares.
(2) The term "transferred a substantial number of shares" means that the total of the shares transferred (i.e. by means of sale, gift, or waiver of pre-emptive rights to new shares in a capital increase in favor of subscription by other specific persons) by the above persons during their capacity as such during the above periods exceeds 10 percent of the shares of the company issued and outstanding at the time when the application for OTC listing is filed, provided that the number of shares duly offer
ed for underwriting or for subscription by recommending securities firms in accordance with GreTai regulations may be excluded.
12. Where the board of directors or supervisors of the applicant company are unable to independently perform their duties.
Determination standards:
(1) The applicant company shall have at least five members in the board of directors, with at least two as independent directors.
(2) The applicant company shall have at least three supervisors, with at least one as independent supervisor.
(3) At least one-third of the directors of the applicant company are not mutually related, or at least one supervisor is not related to any other supervisor or any director, in any of the following ways:
(i) Spouses;
(ii) Lineal relatives within the second degree of kinship;
(iii) Collateral relatives within the third degree of kinship;
(iv) Representatives of the same juristic person; or
(v) Related parties.
(4) Prerequisites to serve as an independent director or supervisor:
(i) Not a juristic person or its representative under Article 27 of the Company Act.
(ii) Free of any circumstance of lack of independence under item (5) hereof during the most recent year.
(iii) Have at least five years of working experience in commercial, legal, or financial affairs or in other fields necessary to the company's business operations; and the directors and supervisors shall each include at least one professional in accounting or finance.
(iv) Have pursued continuing education every year for at least three hours in legal affairs, finance, or accounting and obtained certification documents therefor, since the filing of the guidance contract to the GreTai by the recommending securities firm.
(v) Do not concurrently act as an independent director or supervisor for a combined total of five or more other companies.
(5) To avoid a possible lack of independence, the following persons shall not act as an independent director or independent supervisor:
(a) An employee of the applicant company, or a director, supervisor, or employee of any of its affiliates, except where the position of independent director or supervisor in the applicant company is held concurrently by the independent director or independent supervisor of its parent company or subsidiary.
(b) A natural person shareholder directly or indirectly holding 1 percent or more of the total outstanding shares of, or one of the top 10 natural person shareholders of the applicant company.
(c) A spouse or lineal relative within the second degree of kinship of any of the persons in the preceding two sub-items.
(d) A director, supervisor, or employee of a juridical person shareholder that directly holds 5 percent or more of the total outstanding shares of the applicant company, or of one of the top five juridical person shareholders of the applicant company.
(e) A director, supervisor, manager, or shareholder holding 5 percent or more of the shares of a specified company or institution that has financial or business interactions with the applicant company.
(f) An owner, partner, director, supervisor, or manager of a sole proprietorship, partnership, company, institution, or association that provides financial, business, or legal or consulting services to the applicant company or one of its affiliates, or a professional providing such services, or the spouse of any of the above.
13. Where the applicant company has been registered for trading as an emerging stock on the OTC market 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, supervisor, 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 suc
h trading is for purposes of underwriting under Article 4 of the Criteria or for other legitimate reason.
Determination standards:
(1) The term "director, supervisor, or shareholder holding more than 10 percent of its total issued and outstanding shares" means the person himself or herself.
(2) The term "underwriting under Article 4" includes underwriting and subscription of securities by recommending securities firms at the time of underwriting and of arrangement for subscription by specific persons after underwriting.
14.Where the GreTai deems listing of its stock on OTC markets inappropriate due to the scope or nature of its business or in other special conditions.
Note: The term "related party" as used herein means either of the following persons:
1. With respect to a juristic person or other institution, the related party as defined under the Statement of Financial Accounting Standards No. 6.
2. With respect to a natural person, the spouse and/or minor child(ren).
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