Insider trading regulations in Taiwan: a remark on recent developments.
I. General Background of Insider Trading Regulations in Taiwan
Insider trading has been outlawed in Taiwan since 1988, when Article 157-1 ("Artcle157-1") of the Securities and Exchange Act ("SEA") was promulgated. (1) The statute defines insider trading as the purchase or sale of securities of a public company in an exchange or OTC market, upon actually knowing information with a material impact on the price of the securities of the company ("Material Information"), after the information is precise, and prior to the public disclosure of the information, or within eighteen hours of its public disclosure. (Emphasized terms were latest amended on June 2, 2010.) The ban in Taiwan mainly applies to three categories of persons: (1) Insiders: namely directors, supervisors, managerial officers and controlling shareholders (defined as holding more than ten percent of the share); (2) Constructive insiders: namely persons who have learned information by reason of occupational or controlling relationship, such as accountants, counselors and attorneys. (3) Tipees: persons who have learned the information from insiders. All violators are subject to severe criminal penalty (see below) and civil liability.
II. Ineffective Law Enforcement
A thorough analysis of insider trading cases from 1988 to 2009 shows that the prosecution of Article 157-1 violations has been relatively unsuccessful. It generally takes three to five years for an insider trading case to be investigated, prosecuted and decided by a district court. (2) Meanwhile, only thirty six percent of the Article 157-1 cases that are prosecuted are eventually found guilty by district and higher courts. The figure is substantially lower than other criminal cases, of which the average conviction rates are between eighty eight to ninety six percent from 2000 to 2008. (3)
The circumstances cause fierce twofold criticism against the government for its failure in prosecution of insider trading. The law has been criticized to be too lenient to deter illegal trading of securities, while at the same time too vague to prevent people from being falsely accused. (4) Hence in the past decades, the Legislative Yuan (the Congress) has amended Article 157-1 and its penal provisions three times to increase the penalties and clarify the scope of liability. When the ban first came into effect in 1988, insider trading was a misdemeanor. Imprisonment of less than two years was imposed for those convicted under the law. (5) But under current law, the offenders are subject to three to ten years of imprisonment and/or a fine of ten to two hundreds millions NTD (approximately three hundred twenty thousand to six and a half million USD). (6) How useful this approach of severing punishment may be in protecting market integrity is yet to be observed.
III. Controversies on Materiality and Intent
Commonly invoked, and often successful, defenses in insider trading cases are the Defense of Materiality (arguing that the information lacks materiality) and Defense of Scienter (arguing that the defendant has no intent to use the information). (7) Each of the defenses involves legal controversies that courts' opinions split. It is thus worth reviewing the courts' rulings on these defenses with care. We summarize recent developments in each below.
1. Controversies of Materiality
Paragraph 4 of Article 157-1 provides a legal definition of materiality to be the courts' starting point. It defines material information as (1) information relating to a public company's financial and business performance, or market supply/demand or tender offer of its securities, or (2) information having a material impact on the price of the securities or investment decision of a reasonably prudent investor. (8) Despite the statuary definition, defendants often argue that the nonpublic information, upon which trading had been based, lacks materiality because it was mere speculative in nature, and had not yet been precise enough to have material impact on the price of securities at the time of trading.
With respect to this defense, courts have split on whether there is a clear-cut date for developing information to come into existence. Some courts took a view that there should be a clear-cut date of existence of information, although the date varies depending on the nature of the information. (9) Only after the date of existence would the information be precise and certain enough to be material. As a result, the purchase or sale of securities before the date of existence is not held to be a crime. For example, in the Gouyu case which involved a public company adjusting its predicted reserve in financial forecasting from 2.4 billion to 21.8 billion NTD, the court held that the information, though significant in nature, only came into existence after the date that the board of directors and supervisors adopted the resolution approving the adjustment. (10) The Nankang case vividly shows that the clear-cut date standard has the tendency to delay the materiality of information. The standard also runs the risk of manipulation of the existence date.
Yet other courts reject the clear-cut date standard. They held that "information," different from "fact," does not need to be absolutely certain to be material. (11) Whether the information has gone through certain internal procedures of a company or passed a precise date to be well established is irrelevant when deciding its materiality. Rather, what requires is only that the information is of certain degree of probability that it might come into reality in the foreseeable future. Courts then undergo an ad hoc analysis on the event's impact upon investors' judgment, based upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event. Opinions in this vein are obviously strongly influenced by the U.S. Supreme Court's standard in Basic Inc. v. Levinson. (12)
Authorized by Article 157-1, the Financial Supervisory Commission promulgated the Regulation on Scope of Material Information and Means of its Disclosure in 2006. (13) The Regulation attempts to adopt a rule to clarify the issue of existence date of Material Information. According to Article 5 of the Regulation, material information comes into existence on the earliest precise date when an event can be certain based on concert evidence, such as date of fact, agreement, contract signature, payment, request, execution of transaction, transfer of title and resolution of the audit committee or board of directors. (14)
At first glance, since the term "date of existence" is expressly adopted by the Regulation, some may conclude that the Regulation takes the clear-cut date standard. Nonetheless, the possible existence dates mentioned by the Regulation are so diverse; it actually emphasis the fact that information may come into existence in various phases of an event. From this perspective, the rationale of ad hoc analysis in fact prevails in the Regulation. It necessitates courts to make a case-by-case judgment to figure out the earliest date on which the information had its possible factual foundation, in light of the context of the whole event. Arguably, the standard of Basic seems likely continue to cast a long shadow in Taiwanese courts' decisions on the materiality and existence of information. (15)
2. Controversies on Scienter
Defendants often argue that, despite the fact that they were aware of nonpublic material information, their purchase or sale was based upon other considerations. Given that they do not have the intent of exploiting inside information, they are therefore not liable. Two relevant legal issues arise here: (1) In order to be criminally liable, must the trader actually "use" the information, in particular take the advantage of it and actually gain profits or avoid losses by the trade? (2) Are there exemptions that traders can invoke, such as pre-existing trading plans, to avoid liability even if trading occurs after the possession of inside information?
To begin with, Article 157-1 states only that trading of security is prohibited "upon actually knowing" nonpublic material information. (16) The law does not require showing of use of inside information, not to mention showing profits realized in the trade. Yet courts still split on this issue. Some courts held that trader's intent of using of information has to be shown. (17) Based on such proposition, when a deal seems financially unwise, e.g. purchasing stocks in possession of inside information that would have a negative impact on the prices, or reversely selling stocks when knowing positive information, the courts took the deal as evidence rebutting the trader's intent to use the information. It entails that selling stocks upon positive information or purchasing upon negative information is "allowed", despite the traders' knowledge of inside information.
However, recent Supreme Court decisions disprove the idea that unwise trading can necessarily be an evidence showing absence of intent. (18) The decisions go so far as to deny that the intent to exploiting the information is an element of the offence, which we take as an unfortunate development. They emphasize the fact that, on its face, Article 157-1 does not demand the intent of using the information or profits gained in reality to be shown for an insider trading offense to be established. Moreover, it is often difficult to tell the probable impacts of the information on stock prices in a given short period of time, and the law has no such intent to involve courts into the unnecessarily hard issue in insider trading cases. In short, this approach insists that the law straightforwardly forbids both purchase and sale, be they wise or unwise, as long as an insider is aware of inside information. We rather think that the latter approach places too much weight on the face value of the wording of Article 157-1, and may result in a much broader "insider trading" than other jurisdictions.
We now turn to the related controversy whether courts accept trading based on considerations other than inside information to be exempted from being illegal. As a matter of law, Article 157-1 provides no such exemptions. Executive Yuan has drafted an amendment of Article 157-1 to exempt insider trading based on preexisting trading plans from being illegal in February 2008. (19) However, the Legislative Yuan failed to reach an agreement on whether such exemption is desirable.
Against the background that no explicit exemption is available in statutory laws, some decisions nonetheless accept the "Defense of Involuntary Trade" as a possible way out. (20) The argument of Involuntary Trade goes like this: An insider, who is aware of inside information, perhaps a director, is required by the competent authority to purchase stocks in certain circumstances according to law, say maintaining the minimum share ownership ratios required by SEA. The insider then argues that he or she is in a catch-22 situation--he or she must either violate the share ownership ratios requirement if not purchasing stocks, or commit insider trading if purchasing stocks. Should the insider choose to purchase, the trade is not voluntarily commenced but required by law, and accordingly s/he has no intent to use the information and no liability.
Fairly speaking, the defense is not convincing because the insider may well choose to disclose the information prior to the trade. (21) The Supreme Court has not directly dealt with the defense. Yet estimated from its stances on the issue of intent, the Court is less likely to approve the "Defense of Involuntary Trade". It may also be reluctant to accept that insider trading based on previous plan is legal provided that Article 157-1 has not allowed an explicit exemption.
Preciseness with respect to the legal elements that constitute the offences, as well as effectiveness with respect to execution of the law, is the linchpin of insider trading regulation. Taiwan has gone a long way to sharpen its legal tool to maintain market integrity, although more challenges are yet to come.
(1) Zheng quan jiao yi fa [Securities and Exchange Act] (promulgated by Precedent, Apr. 30, 1968, effective May 2, 1968, last amended Nov. 24, 2010), art. 157-1, translated in LawBank available at http://www.lawbank.com.tw/ (last visited Oct. 15, 2011) (Taiwan).
(2) ZHUANG JIA-HUI, NEI XIAN JIAO YI ZHI SHI ZHENG YAN JIU, [THE EMPIRICAL STUDY OF THE INSIDER TRADING] 88-89 (Jul. 2009) (unpublished LL.M. thesis, National Chiao Tung University, on file with National Central Library (Taiwan)).
(3) Id. at 125.
(4) See e.g. LIU LEN-YU, NEI XIAN JIAO YI GOU CHENG YAO JIAN [LEGAL ELEMENT OF INSIDER TRADING], 4 (2011).
(5) SEA, art. 175 of 1988 (promulgated by Precedent, Jan. 29, 1988, effective Feb. 1, 1988), 4881 ZONG TONG EU GONG BAO [OFFICE OF THE PRESIDENT COMMUNIQUE] 16 (Taiwan). For laws that are no longer effective, English translation is not available at LawBank.
(6) SEA, art. 175, supra note 1.
(7) ZHUANG JIA-HUI, supra note 2, at 141.
(8) SEA, art. 157-1, supra note 1.
(9) See e.g. Tai wan gao dengfa yuan 92 nian du shang yi zi di 560 hao xing shi pan jue, (Tai wan gao deng fa yuan [Yaiwan High Court], Dec. 25, 2003), available at http://jirs.judicial.gov.tw/Index.htm (last visited Oct 15, 2011).
(10) Tai wan gao deng fa yuan 89 nian du shang yi zi di 4472 hao xing shi pan jue, (Tai wan gao deng fa yuan [Taiwan High Court], Dec. 19, 2001), available at http://jirs.judicial.gov.tw/Index.htm (last visited Oct 15,2011).
(11) See e.g. Tai wan gao dengfa yuan 97 nian du zhu shang zhong geng yi zi di 4 hao xing shi pan jue, (Tai wan gao deng fa yuan [Yaiwan High Court], Nov. 13, 2008), available at http://jirs.judicial.gov.tw/ Index.htm (last visited Oct 15,2011).
(12) 485 U.S. 224 (1988).
(13) Zheng quan jiao yi fa di yi bai wu shi qi tiao zhi yi di wu xiang ji di liu xiang zhong da xiao xi fan wei ji qi gong kai fang shi guan li ban fa [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] (promulgated by Financial Supervisory Commission, May 30, 2006, effective June 1, 2006, last amended Dec. 22, 2010), art. 5, translated in LawBank (last visited Oct. 15, 2011) (Taiwan).
(15) See Lin Meng-Huang, Nei xian jiao yi de gui fan li lun ji chu yu zhong da xiao xi ren ding [The Theorical Foundation of Insider Trading Regulations and the Materiality of Information], 61 FA LING YUE KAN [THE LAW MONTHLY] 1406, 1431 (Sep. 2010).
(16) SEA, supra note 1.
(17) Tai wan tai bei di fang fa yuan 94 nian du su zi di 1152 hao xing shi pan jue, (Tai wan tai bei di fang fa yuan [Yaiwan Taipei District Court], Jul. 25, 2007), available at http://jirs.judicial.gov.tw/Index.htm (last visited Oct 15, 2011).
(18) See e.g. Zui gao fa yuan 99 nian du tai shang zi di 8070 hao xing shi pan jue (Zui gao fa yuan) [Supreme Court (Taiwan)], Dec. 23, 2010), available at http://jirs.judicial.gov.tw/Index.htm (last visited Oct 15, 2011). Please note that Taiwan follows civic law tradition where stare decisis does not apply. Supreme Court decisions, influential as they may be, are neither binding nor necessary conclusive on every issue. When different chambers have diverse opinions on an issue, Supreme Court cases delivered by different chambers may contradict one another, unless the Court takes a unified position by selecting binding precedents in a joint conference.
(19) 3645 LI FA YUAN GONG BAO [LEGISLATIVE YUAN COMMUNIQUE], 191 (Jul. 2008).
(20) See e.g. Zui gao fa yuan 91 nian du tai shang zi di 3037 hao xing shi pan jue (Zui gao fa yuan) [Supreme Court (Taiwan)], Dec. 23, 2010), available at http://jirs.judicial.gov.tw/Index.htm (last visited Oct 15,2011).
(21) See LAI IN-JAW, ZUI XIN ZHENG QUAN JIAO YI FA JIE XI [ANALYSIS ON THE LATEST SECURITY AND EXCHANGE ACT], 546 (2nd ed., Oct. 2009).
Edgar Y. Chen is a partner with Tsar & Tsai Law Firm. Prior to joining Tsar & Tsai in 1997, Dr. Chen had served as a prosecutor and a district court judge. He has over twenty years experience in litigation, representing international high tech companies on cases including IP rights related disputes and securities law violation. Dr. Chen obtained his LL.M. degrees from National Taiwan University (NTU) Law School in 1983 and Michigan Law School in 1993 and his Ph.D. degree from NTU Law School in 1994.
Ya-Wen Yang is an associate with Tsar & Tsai Law Firm. She had clerked for three Constitutional Judges, and been a civil servant before recently joined Tsar & Tsai. Ms. Yang attended NTU Law School, where she was granted LL.B and LL.M in 1999 and 2002 respectively. She is a 2007 LL.M. graduate of Yale Law School
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|Author:||Chen, Edgar Y.; Yang, Ya-Wen|
|Publication:||Defense Counsel Journal|
|Date:||Jan 1, 2012|
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