The Securities Litigation Review: Taiwan
i Sources of law
The primary source of securities law in Taiwan is the Securities and Exchange Act (the Securities Act), which governs the regulation and supervision of public offering, issuing, and trading of securities. In addition, any matters not provided for in the Securities Act shall be governed by the provision of the Company Act and other relevant acts. Besides such laws, subordinate rules and regulations, such as the Securities Act Enforcement Rules, Regulations Governing the Offering and Issuance of Securities by Securities Issuers and so forth, are promulgated by the competent authority, namely the Financial Supervisory Commission. Moreover, the guidelines and principles established by the self-regulatory associations, such as the Taiwan Stock Exchange Corporation2 and the Taipei Exchange,3 also play an important role for the regulation and supervision of securities-related activities.
ii Regulatory authorities
The competent authority under the Securities Act is the Financial Supervisory Commission. Administrative dispositions and fines can be imposed by the commission in the event that there is any violation of the Securities Act as provided thereunder. Certain violations of the Securities Act may result in criminal liabilities; and, therefore, the public prosecutors will commence an investigation. If the evidence obtained by the public prosecutor in the course of investigation is sufficient to show that the accused is suspected of having committed an offence, a public prosecution shall be initiated.
iii Common securities claims
Common securities claims in Taiwan include, but are not limited to, insider trading, securities market manipulations, misrepresentations or frauds (for example, financial statement frauds and misrepresentation in a prospectus). Criminal liabilities will be imposed on the individuals who committed such offences. Secondary liabilities may incur to accountants and lawyers as provided in the Securities Act. For example: (1) if a lawyer issues a false or untrue opinion regarding any contract, report or document of the company or foreign company related to securities offering, issuance, or trading; and (2) if an accountant fails to faithfully fulfil his or her audit duties and issues a report or opinion with respect to any material falsehood or error in a financial report, document, or information reported or published by a company or foreign company; or he or she fails to expressly state a material falsehood or error in a company or foreign company financial report owing to failure to audit in accordance with applicable laws and regulations and generally accepted audit principles, the lawyer or accountant shall be punished with imprisonment for not more than five years, or a fine of not more than NT$15 million may be imposed in lieu thereof or in addition thereto according to Article 174, Paragraph 2, Subparagraphs 1 and 2 of the Securities Act. In addition to criminal liabilities, said lawyers and accountants will be held jointly liable, 'within the scope of their responsibilities', with the issuer to any bona fide counterpart for damages resulted therefrom. However, because it is not an easy job to identify the scope of the responsibility of a lawyer or accountant and to prove the causation, in practice, investors may find it difficult to successfully claim damages against such lawyers and accountants.
i Forms of action
Civil liabilities under the Securities Act
According to Article 20, Paragraph 3 of the Securities Act, in the event that there are any representations, frauds or any other acts that are sufficient to mislead other persons during the public offering, issuing, private placement or trading of securities, the person who did such an action or actions shall be held liable for damage sustained by bona fide purchasers or sellers of the securities.
According to Article 20-1, Paragraph 1 of the Securities Act, when the essential content of the financial reports or any other relevant financial or business documents filed or publicly disclosed by an issuer in accordance with this act contain misrepresentations or non-disclosures, the issuer and its responsible persons, and employees of the issuer who placed their signatures or seals on the financial report or the financial or business document in question, shall bear liability for damage suffered by the bona fide purchasers, sellers or holders of securities issued by the issuer.
According to Article 31, Paragraph 2 of the Securities Act, in the event that a prospectus is not delivered to the subscriber of securities prior to public offering, the violator shall be held liable for the compensation of damage sustained by any bona fide counterpart.
According to Article 32, Paragraph 1 of the Securities Act, in the event that the prospectus for public offering contains false information or omissions in its material contents, the following persons, within the scope of their responsibilities, shall be held jointly liable with the issuer to any bona fide counterpart for damage resulting therefrom: (1) the issuer and its responsible persons; (2) any employee of the issuer who has signed and affixed his or her seal on the prospectus to certify its accuracy in whole or in part; (3) any underwriter with respect to such securities; and (4) any certified public accountant, lawyer, engineer or any professional or technical person who has signed and affixed his or her seal to certify in whole or in part, or to present his or her opinion, on the correctness of the prospectus.
According to Article 155, Paragraph 3 of the Securities Act, the violator shall be held liable to compensate the damage suffered by the bona fide purchasers or sellers of the securities in the event that any of the following actions occur with regard to securities publicly listed on a stock exchange:
- ordering or reporting a trade on a centralised securities exchange market and failing to perform settlement after the transaction is made, where such act is sufficient to affect the market order;
- conspiring with other parties in a scheme such that the first party buys or sells designated securities at an agreed price, while the second party sells or buys from the first party in the same transaction, with the intent to inflate or deflate the trading prices of said securities on the centralised securities exchange market;
- continuously buying at high prices or selling at low prices designated securities for his or her own account or under the names of other parties with the intent to inflate or deflate the trading prices on said securities traded on the centralised securities exchange market, when there is a likelihood that market prices or market order will be affected;
- continuously ordering or reporting a series of trades under one's own account or under the names of other parties, and completing the corresponding transactions with the intent of creating an impression on the centralised securities exchange market of brisk trading in a particular security;
- spreading rumours or false information with the intent to influence the trading prices of designated securities traded on the centralised securities exchange market; and
- directly or indirectly performing any other manipulative acts to influence the trading prices of securities traded on the centralised securities exchange market.
According to Article 157-1, Paragraphs 1 to 3 of the Securities Act: (1) the director, supervisor, managerial officer of the issuing company or a natural person designated to exercise powers as representative pursuant to Article 27, Paragraph 1 of the Company Act; (2) shareholders holding more than 10 per cent of the shares of the company; (3) any person who has learned the information by reason of occupational or controlling relationship; (4) a person who, though no longer among those listed in one of the preceding three points, has only lost such status within the last six months; and (5) any person who has learned the information from any of the persons named in the preceding four subparagraphs, shall not:
- purchase or sell, in the person's own name or in the name of another, 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, upon his or her actual knowledge of any information that will have a material impact on the price of the securities of the issuing company; or
- sell, in the person's own name or in the name of another, the non-equity-type corporate bonds of such company that are listed on an exchange or an over-the-counter market, upon his or her actual knowledge of any information that will have a material impact on the ability of the issuing company to pay principal or interest.
The restriction period for the aforementioned transaction is after the information is precise and is prior to the public disclosure of such information or within 18 hours of its public disclosure.
Persons in violation of the above shall be held liable to the trading counterparts who undertook the opposite-side trade with bona fide intent. The court may treble the damages, upon request of the counterpart, or reduce the damages where the violation is minor.
In terms of class action, the Securities Investor and Futures Trader Protection Act was enacted to safeguard the rights and interests of securities investors and futures traders and promote the sound development of the securities and futures markets, under which the protection institution may submit a matter to arbitration or institute an action in its own name with respect to a securities or futures matter arising from a single cause that is injurious to multiple securities investors or futures traders, after having been so empowered by no fewer than 20 securities investors or futures traders.
As for shareholder derivative actions, shareholders who continuously have held 3 per cent or more of the total number of the outstanding shares of the company for over one year shall first request in writing the supervisors of the company to institute, for the company, an action against a director of the company, and in case the supervisor fails to institute an action within 30 days of having received the request, then the shareholders filing such request may institute the action for the company.
One of the most salient features of a securities claim is that the damage suffered by each of the investors may be small but there are thousands of people affected by a single cause. It is very difficult, and costs a lot, for an individual to bring civil action against big companies, and investors may reside in different parts of the country, which makes it troublesome for them to file a lawsuit before the court where the company is located. Therefore, in Taiwan the protection institution may institute an action in its own name with respect to a securities or futures matter arising from a single cause that is injurious to multiple securities investors or futures traders, after having been so empowered by no fewer than 20 securities investors or futures traders.
There is no discovery in Taiwan, which makes it difficult for the plaintiffs to collect evidence. To ease the burden of proof, a statutory presumption of fault is provided under the Securities Act, and for this kind of liability, it will be the defendant who shall bear the burden of proof that he or she has exercised reasonable care.
Settlements of securities actions do not have special regulation under Taiwanese law, unless the action is brought by the protection institution and the securities investors specifically restrict the institution's power to enter into a settlement. Judicial review for settlement in a civil proceeding is minimal; in practice, the court will only review the enforceability of the terms of the settlement.
iv Damages and remedies
The remedies that investors may seek include compensation for the injuries actually suffered and the interest that has been lost. For insider trading, Article 157-1 of the Securities Act specifically stipulates the calculation of damages that shall be the amount of the difference between the buy or sell price and the average closing price for 10 business days after the date of public disclosure. In addition, the court may also, upon the request of the counterpart trading in good faith, treble the damages payable by the violators should the violation be of a severe nature; while the court may, on the other hand, reduce the damages where the violation is minor.
i Forms of action
Under the Securities Act, the Financial Supervisory Commission has the power to conduct supervision on public companies.
For example, a company shall file with the Financial Supervisory Commission and announce to the public the class and numbers of the shares held by its directors, supervisors, managerial officers and shareholders holding more than 10 per cent of the total shares of the company. The total shares of nominal stocks held by the entire body of either directors or supervisors of an issuer shall not be less than a certain percentage of its total issued shares, which varies depending on the paid-in capital of the company.
Furthermore, the transfer of stocks by said persons shall be effected in accordance with any of the following methods: (1) an offering to the public following approval from or an effective registration with the Financial Supervisory Commission; (2) to transfer, at least three days following registration with the Financial Supervisory Commission, on a centralised exchange market or an over-the-counter market, shares that have satisfied the holding period requirement and within the daily transfer allowance ratio prescribed by the Financial Supervisory Commission;4 and (3) to transfer, within three days following registration with the Financial Supervisory Commission, by means of private placement to designated persons satisfying the qualifications prescribed by the Financial Supervisory Commission.
Administrative fines will be imposed by the Financial Supervisory Commission if there is any violation of the above requirements.
In order to protect public interests and the interests of investors, the Financial Supervisory Commission may, before the approval of a public offer or issuance, require the issuer, securities underwriters, or other related parties to submit reference materials or reports, or make a direct examination of relevant documents and accounts. After the issuance of securities, the Financial Supervisory Commission may, at any time, order the issuer to submit financial and business reports or makes a direct examination of the financial and business conditions of the issuer.
During the aforementioned examination, the Financial Supervisory Commission may issue a corrective order, or it may additionally impose penalties pursuant to the Securities Act if it finds that the issuer has failed to comply with an act or regulation.
The Financial Supervisory Commission will collaborate with the public prosecutor's office in the event suspicious criminal offences are discovered from its examination of the reports, direct inspection or investigation or by any other means.
Under the Securities Act, most of the possible criminal liabilities are severe, and therefore, the public prosecutor may not have the discretion to make a ruling to render a deferred prosecution by setting up a period not more than three years and not less than one year according to Article 253-1 of the Code of Criminal Procedure. Moreover, 'materiality' is not an element of certain securities-related crimes, for example misrepresentation in financial statement; that is to say, any immaterial offence may still trigger criminal prosecution and the following time-consuming criminal proceeding. Directors and the management team of a public company, including the company itself, will be trapped in the criminal proceeding even if there is just one minor mistake in the financial report. What the law provides leaves little or even no room for the public prosecutor to make a more 'appropriate' disposition and sometimes the criminal prosecution or proceeding itself further deteriorates the management of the company and it is the investors who will suffer therefrom, eventually. This was not the original purpose of the enactment of the Securities Act. Notably, in 2017 there was a case involving financial statement misrepresentation, and the district prosecutor's office decided to render a deferred prosecution considering there was no damage incurred to the company. This decision was later overruled by the Taiwan High Prosecutors Office, and the district prosecutor's office, after further investigation, decided to initiate prosecution.
In terms of the criminal proceeding against securities-related offenders, some of the difficulties faced in Taiwan are highlighted below.
Difficulties in collection of evidence
Most of the major financial crimes have the following common characteristics: they are conducted internally in secrecy, and covered by or disguised as legal actions. It would be very difficult for the law enforcer, as an outsider, to uncover all the hidden facts. Especially in relation to cross-border transactions, the Taiwanese government, subject to its political status in international society, has limited access to judicial assistance from other jurisdictions.
Difficulties in tracing overseas cash flow, seizure of criminal proceeds and extradition
Again, owing to the fact that Taiwan's position in the world is still 'ambiguous', even when the criminals are finally convicted, if the proceeds were hidden overseas, it is difficult to recover and confiscate such proceeds of crime. In addition, if the accused flees the country, in most cases to mainland China, without formal extradition, prosecution cannot proceed and justice cannot be achieved.
Lack of discretion for the prosecutor
As mentioned above, although the law provides systems such as deferred prosecution and bargaining process, the application is limited, primarily for misdemeanours. Public prosecutors do not have the discretion, nor gain leverage to extract guilty pleas from defendants and to reduce the number of cases that go to the court.
According to Article 253-1, Paragraph 1 of the Code of Criminal Procedure, if an accused has committed an offence other than those punishable with the death penalty, life imprisonment, or a minimum term of imprisonment of not less than three years, the public prosecutor, after considering the matters specified in Article 57 of the Criminal Code and the maintenance and protection of public interest, deems that a deferred prosecution is appropriate, he or she may make a ruling to render a deferred prosecution by setting up a period of between one and three years, starting from the date the ruling of deferred prosecution is finalised. A public prosecutor when making a ruling on deferred prosecution may require the defendant to comply with or perform the following items within a limited period of time: (1) apologise to the victim; (2) make a written statement of repentance; (3) pay the victim an appropriate sum as compensation for property or non-property damage; (4) pay a certain sum to a governmental account or a designated non-profit or local self-governing organisation; (5) perform 40 to 240 hours of community services to a designated non-profit, local self-governing organisation, or community; (6) complete drug addiction treatment, psychotherapy and counselling, or other appropriate treatments; (7) comply with the necessary order for the protection of the victim's safety; or (8) comply with the necessary order for the prevention of recommitting the offence. Before a public prosecutor can order the defendant to comply or perform the acts specified in items (3) to (6), the defendant's consent shall be obtained; items (3) and (4) may also constitute a ground for civil compulsory enforcement.
Except for those who have committed an offence that is punishable with a sentence of capital punishment, life imprisonment or more than three years' imprisonment, or is adjudicated by the court of appeal as the court of first instance, once a case has been prosecuted by a prosecutor or applied for a summary judgment, after consulting with the victim's opinion the prosecutor may, before the close of oral arguments in the court of first instance or before the summary judgment, act on his or her own discretion or upon requests by the defendant, his or her agent or attorney that has been approved by the court, to negotiate the following items outside the trial procedure. Once both parties involved reach an agreement and the defendant pleads guilty, the prosecutor may request the court to make judgment pursuant to the bargaining process: (1) the defendant accepts the scope of sentence or accepts the sentence to be placed under probation; (2) the defendant shall apologise to the victim; (3) the defendant shall pay a certain amount of compensation; and (4) the defendant shall pay a certain amount to the government treasury, designated public interest organisations, or local autonomous organisations. The prosecutor shall obtain the victim's consent before negotiating with the defendant on items listed in items (2) or (3).
iv Sentencing and liability
A person who has committed any of the offences stipulated in the Securities Act shall be punished with one or more of imprisonment for certain period of time, detention and a fine, depending on what the law provides. Factors that may aggravate the punishment include, for example: (1) the property or property interest obtained from the commission of an offence under Article 171, Paragraph 1 of the Securities Act equals NT$100 million or more; (2) where the property or property interest obtained from commission of an offence under Article 171, Paragraph 1 or 2 of the Securities Act exceeds the maximum amount of the criminal fine, the fine may be increased within the scope of the property or property interest obtained; and (3) if the stability of the securities market is harmed, the punishment shall be increased by half. As for factors that may mitigate the punishment, punishment can be reduced if: (1) a person who commits an offence and subsequently voluntarily surrenders him or herself and hands over the proceeds of crime in full; (2) a person who commits an offence and confesses during the prosecutorial investigation and he or she voluntarily hands over the proceeds of crime in full, and where another principal offender or an accomplice is captured as a result, the punishment shall be reduced by half; and (3) for the making of false statements in the content of a financial report by a managerial officer or accounting officer who signs or seals the financial report, the punishment may be reduced or remitted if the person has submitted a corrective opinion and provided evidence in a report to the Financial Supervisory Commission before it or a judicial agency has commenced an investigation ex officio or upon a complaint filed by another person.
In addition to criminal liabilities, the Financial Supervisory Commission may impose administrative fines, within the range as provided in the Securities Act where applicable, on the violators as well.
i Regulations on foreign issuers
To manage and supervise the public offering, issuance, private placement and trading of the securities issued by a foreign company that has been approved, in Taiwan, by the stock exchange or over-the-counter securities exchange for listed trading on the stock exchange or over-the-counter market, or for registration as emerging stock, the Securities Act shall apply mutatis mutandis. Different sets of rules will apply depending on whether the foreign company's stock is traded on a foreign securities exchange or not. Foreign traded companies are less regulated, as such companies are subject to the supervision of a foreign securities competent authority.
In addition, a foreign company shall designate a representative in Taiwan to represent the company in litigious and non-litigious matters under the Securities Act, and to serve as its responsible person under that Act in Taiwan. The representative shall have a domicile or residence in Taiwan. The foreign company shall file the name, domicile or residence, and power of attorney of its representative with the Financial Supervisory Commission, and shall update this information in the event of any changes.
ii Jurisdiction issues
A foreign issuer should specify in its articles of incorporation or organisational documents that matters in connection with protection of shareholder equity are subject to the jurisdiction of Taiwanese courts.
However, when the laws and regulations of a foreign issuer's country of registration explicitly provide that important matters in connection with protection of shareholder equity are subject to mandatory provisions regarding exclusive jurisdiction of a foreign court, so that Taiwanese courts cannot be adopted as part of its articles of incorporation or organisational documents, this shall be disclosed in the prospectus, and it shall have no less than two directors (including the independent directors) who are domiciled in Taiwan.
Year in review
The latest amendment to the Securities Act was adopted on 21 June 2019, which requires the management team, including the chairperson of the board, the managerial officer and accounting officer, to sign or stamp on the financial reports, in order to improve the internal managing process of a company.
Outlook and conclusions
One of the important pieces of pending legislation is the proposal to enhance independent directors' exercise of their power to monitor public company management, by prohibiting the company or other board members from hindering, refusing or evading the performance of duty conducted by the independent directors. However, the reality is that independent directors are elected by the majority of shareholders, as are other board members, and if the company is still controlled by such a majority, no matter what powers are vested in the independent directors, it may not be practical to expect their full independence.