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IV.Exercise of the right of disgorgement against directors, supervisors, officers and Major Shareholders, and ban of insider trading
To prevent insiders such as directors, supervisors, officers and major shareholders holding more than 10% of the shares in the company from endeavoring to exploit insider information thus becoming less intent on operating the company, and also to prevent investors of the securities market from experiencing a loss of confidence which may gravely affect the fairness and function of the securities market, major countries around the world, such as the U.S., U.K., Japan etc., all prohibit insider trading expressly in laws. To make up any deficiency in insider trading regulations and achieve the purpose of banning such trading, the right of disgorgement is designed to grant benefits derived from short-term trading to the company concerned.
- Disgorgement - short-swing trading by insiders
A stock issuing company shall claim for the disgorgement of any profit realized by an insider of such company from short-swing trading in the company's TWSE- or GTSM (Gre Tai Securities Market)-listed stock or other securities with the nature of equity (Securities and Exchange Act §157).
- Persons whose profits shall be allocated to the company:
These persons refer to insiders of a publicly held company, including its directors, supervisors, officers, and shareholders with more than 10% of its shares. In calculating the shareholding of an insider, shares held by its spouse and minors and those held in another person's name (Securities and Exchange Act Enforcement Rules §2) shall all be included.
- Securities traded by insiders in short-swing trading:
Pursuant to Article 157, Paragraph 6 of the Securities and Exchange Act and Article 11, Paragraph 1 of the Securities and Exchange Act Enforcement Rules, these securities shall include common shares and preferred shares listed on the TWSE and GTSM, convertible corporate bonds, corporate bonds with warrants, stock warrants, call (put) warrants, certificates of payment for shares, stock warrant certificates, certificates of entitlement to new shares, bond conversion entitlement certificates, Taiwan depositary receipts, and other equity-type securities.
- Forms of short-swing trading:
Short-swing trading means the sale by a company insider of the company's TWSE- or GTSM-listed stocks or other securities with the nature of equity as held by it within six months after acquisition or the repurchase of such securities within six months after their sale, in which event the company may claim disgorgement against the insider of any profit realized from the price difference.
Short-swing trading is not necessarily insider trading, but provisions governing insider trading and disgorgement apply if the insider makes use of unpublished material information to engage in the short-swing trading.
- Persons entitled to claim of disgorgement against insiders:
When an insider engaging in short-swing trading gains a profit, the board or a supervisor shall exercise the right of disgorgement against it on the company's behalf and allocate the profit to the company. If the board of directors or the supervisor fails to exercise the right of claim for disgorgement on behalf of the company, its shareholders may request the directors or the supervisors to so exercise within 30 days; if the directors or supervisors still fail to do so upon the expiration of such period, the requesting shareholders shall have the right to claim for disgorgement against the insider on behalf of the company (Securities and Exchange Act §157II).
The directors or supervisors shall be jointly and severally liable for damages suffered by the company as a result of their failure to exercise the claim for disgorgement on the company's behalf (Securities and Exchange Act §157III).
- Time limit for exercising the right of disgorgement against an insider
Disgorgement may be claimed against an insider within two years after the date the insider realizes a profit and is no longer claimable after the two-year time limit if not exercised within said period (Securities and Exchange Act §157IV).
- Calculation of profit to be disgorged: the highest selling price minus the lowest purchasing price (Securities and Exchange Act Enforcement Rules §11II):
- The price difference shall be calculated in a manner that the highest selling price matches the lowest purchasing price, the second highest selling price matches the second lowest purchasing price, and so on; losses are not included.
- The dividends received by the traded stocks shall be included into the price difference calculation in Subparagraph A.
- A 5% legally mandated interest under Article 203 of the Civil Code shall be added into the price difference. Such interest shall be calculated based on the date of last trading until the date of disgorgement to the company, in the case of Subparagraph A, and the date cash dividends are received until the date of disgorgement to the company in the case of Subparagraph B.
- The commissions charged by securities firms and the securities transaction tax arising from such trading shall be deducted from the profit in calculating the profit differential in Subparagraph A.
- Insider trading:
An insider of a stock issuing company or any person who has learned, by reason of an occupational or controlling relationship, information that will have a material impact on the stock price of the issuing company, is deemed to engage in trading with insider information, or insider trading, if it purchases or sells 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 prior to the public disclosure of such information or within 18 hours after its public disclosure (Securities and Exchange Act §157-1).
- Persons not allowed to engage in insider trading:
- Insiders:
Insiders include directors, supervisors, officers, natural persons designated as proxy to exercise the duties of a shareholder in its behalf pursuant to Article 27, Paragraph 1 of the Company Act, and shareholders with more than 10% of the shares of a stock issuing company. In calculating the shareholding of an insider, shares held by its spouse and minors and those held in another person's name (Securities and Exchange Act Enforcement Rules §2) shall all be included.
- Persons learning information by reason of an occupational or controlling relationship:
Examples are securities firms, investment consultants, securities analysts, journalists, persons hired by an issuer to handle business, lawyers, accountants etc., and police and investigation and judicial officers learning insider information in the course of their performance of duties in the investigation of Securities and Exchange Act cases.
- To prevent malpractice, persons losing the status in Subparagraphs A and B within the last six months are still governed by this article.
- Persons learning the information from any of the persons named in the preceding three subparagraphs.
- Information that has a material impact on the stock price of the company
As authorized by Article 157-1 of the Securities and Exchange Act on May 30, 2006, and in the Regulations Governing the Scope of Material Information and the Means of its Public Disclosure Under Article 157-1, Paragraphs 5 and 6 of the Securities and Exchange Act amended December 22, 2010 ("Material Information Regulations"), the FSC divides information with a material impact on the stock price of a company into two types. The first type of material information concerns the company's finance and business that has a material impact on the stock price of the company or on the investment decisions of a reasonably prudent investor, including the following information according to Article 2 of the Material Information Regulations:
- A matter provided in Article 7 of the Securities and Exchange Act Enforcement Rule.
- The company carries out any material transaction of public offering and issuance or private placement of equity-type securities, capital reduction, corporate merger, acquisition, or split, share exchange, conversion, or transfer of shares from others, direct or indirect investment project, or there is any material change in any of the above matters.
- The company is in proceedings for reorganization, bankruptcy, dissolution, or application for stock delisting or termination of OTC securities trading, or there is any material change in any of the above matters.
- A member of the company's board of directors is subject to a provisional injunction ruling suspending his or her exercise of powers, making it impossible for the board of directors to exercise its powers, or all independent directors of the company are removed from office.
- Occurrence of a disaster, group protest, strike, or environmental pollution, or any other material event, where the company incurs a material loss, or where a relevant authority orders suspension of work, suspension of business, or termination of business, or revokes or voids a relevant permit.
- Dishonor of a negotiable instrument, filing for bankruptcy or reorganization, or any other similar event of a material nature, with respect to a related party of the company or to a principal debtor or a joint and several guarantor of a principal debtor; or inability by a principal obligor, in favor of whom the company has made an endorsement or guarantee, to settle a matured negotiable instrument, loan, or other obligation.
- Occurrence of a significant event of internal control-related malpractice, non arms-length transaction, or defalcation of company assets.
- Suspension of part or all of business transactions between the company and a principal client or supplier.
- Upon occurrence of any of the following with respect to a financial report of the company:
- Failure to make a public announcement or a filing in a manner consistent with the requirements of Article 36 of the Act.
- An error or omission in a financial report prepared by the company, with respect to which Article 6 of the Enforcement Rules to the Act requires a correction to and further a restatement of the financial report.
- A certified public accountant issues an audit or review report containing an opinion other than an unqualified or modified unqualified opinion. The same does not apply, however, in cases where the certified public accountant issues a qualified audit or review report for the reason of annual amortization of losses, as permitted by law, or for the reason that an amount of long-term equity investment and profit/loss thereupon presented in the first-quarter, third-quarter, or semiannual financial report is calculated on the basis of financial statements of the investee company that have not been audited or reviewed by a certified public accountant.
- A certified public accountant issues an audit or review report indicating substantial doubt about the going-concern assumption.
- A significant discrepancy between financial forecasts already publicly disclosed and actual figures or between updated (or corrected) financial forecasts and original forecasts.
- The company's operating income or income before tax shows a significant change from the same period of the previous year, or shows a significant change compared with the previous period and the change is not caused by seasonal factors.
- When any of the following accounting events occurs to the company, and the event, although it does not affect the profit/loss of the current period, has resulted in a material change in the net worth of the current period:
- Revaluation of assets.
- Valuation of financial instruments.
- Foreign currency translation adjustments.
- Financial instruments accounted for using hedge accounting.
- Net losses not recognized as retirement fund costs
- The fundraising plan for corporate bond redemption cannot be carried out.
- The company buys back its own shares.
- The company makes or suspends a public tender offer to acquire securities issued by a public company.
- The company acquirers or disposes of a major asset.
- If the company has issued securities overseas, occurrence of a material event that requires prompt public announcement or filing, as provided in the government laws and regulations, or securities exchange market rules and regulations, of the country where the securities are listed.
- Other matters relating to the finances or businesses of the company that would have a material impact on its stock price or on the investment decisions of a reasonably prudent investor.
Pursuant to Article 3 of the Material Information Regulations, the second type of material information refers to information relating to the market supply and demand of such securities that would have a material impact on the company's stock price or on the investment decisions of a reasonably prudent investor, referring to any of the following:
- The company's securities traded on the centralized securities exchange market or the OTC securities market are subject to a public tender offer or suspension of a public tender offer.
- Any material change in the shareholding of the company or its controlling company.
- The company's securities traded on the centralized securities exchange market or the OTC securities market are subject to an event of bidding, auctioning, material default in settlement, change of the original method of trading, or suspension, limitation, or termination of trading, or there is any circumstance that may lead to any such event.
- Persons duly charged with exercising searches under the law conduct a search of the company, its controlling company, or any of its major subsidiaries as defined in Article 2-1, Paragraph 2 of the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants.
- Any other matter relating to the market supply and demand of such securities that would have a material impact on the company's stock price or on the investment decisions of a reasonably prudent investor.
- Information that will have a material impact on the ability of the company to pay principal or interest
This refers to any of the following information save in the event of companies issuing corporate bonds under a bank guarantee:
- Any matter set out in Article 7, subparagraphs 1 to 3 of the Securities and Exchange Act Enforcement Rules.
- Any matter set out in Subparagraphs E to H, Subparagraph I, Item d, and Subparagraph M, of Article 2.
- The company is in proceedings for reorganization, bankruptcy, or dissolution.
- The company suffers a material loss, and the loss is likely to result in financial difficulty, suspension of business, or termination of business.
- The amount of the company's current assets, with inventory and prepaid expenses deducted and net cash inflows generated before the maturity date of corporate bonds added, is insufficient to cover the principal or interest due in the near future for the most recent period and other current liabilities.
- The interest of any already issued corporate bonds is calculated at a non-fixed interest rate, and the interest expenses have risen significantly due to market interest rate fluctuations and affect the ability of the company to pay principal or interest.
- Any other matter that could affect the ability of the company to pay principal or interest.
- Ways of disclosure of material information:
The ways of disclosure of material information are set forth in Article 6 of the Material Information Regulations. Public disclosure of information defined in Articles 2 and 4 of such regulations (information relating to the finance or business of a company that would have a material impact on its stock price or on the investment decisions of a reasonably prudent investor, or information that will have a material impact on the ability of the company to pay principal or interest) is made when such information is entered on the Market Observation Post System.
For the purposes of Article 3 of the same regulations (regarding information relating to the market supply and demand of such securities that would have a material impact on its stock price or on the investment decisions of a reasonably prudent investor), public disclosure of information means any of the following:
- The company enters such information on the Market Observation Post System.
- The Taiwan Stock Exchange Corporation publicly announces the information on the Market Information System website
- The GreTai Securities Market publicly announces the information on the Market Information System website.
- Coverage of the information in two or more daily national newspapers on non-local news pages, national television news, or electronic newspapers issued by any the aforesaid media. In the case of information publicly disclosed in this way, the period of 18 hours referred to in Article 157-1, Paragraph 1, of the Securities and Exchange Act shall begin with the later of the time of delivery of the newspaper, first broadcasting of the television news, or posting of the news on the electronic website, as the case may be. (The time of delivery of a newspaper referred to in the preceding paragraph means 6 a.m. for morning newspapers and 3 p.m. for evening newspapers.)
- Unless they have reasonable cause to believe the information had already been publicly disclosed, persons engaging in insider trading shall be held liable for damages to trading counterparts who unknowingly undertook the opposite-side trade with bona fide intent if such persons violate their recusal or disclosure obligations, whether they gain a profit from the insider trading or not, even if they suffer a loss (Securities and Exchange Act §157-1III), and shall also be criminally liable (Securities and Exchange Act §171).
- Statute of limitations for the claim of damages against a person engaging in insider trading:
The right to claim shall be exercised within two years from the time the claimant learns of the cause which entitles him the right to claim, or within five years from the offering, issuance or trading, and is no longer exercisable after such periods expire.
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