Newsletter
ISSUES OVER EXERCISE OF EQUITY OPTIONS
On 20 January 2003, with the approval of the Securities and Futures Commission (SFC), the Taiwan Futures Exchange (TaiFex) launched and listed equity option contracts based on the common stock of five companies: Taiwan Semiconductor Manufacturing Company Ltd., United Microelectronics Corporation, Nan Ya Plastic, China Steel Corporation and Fubon Fi-nancial Holding Co., Ltd.. All these contracts include both call and put options, and are to be exercised in the European style (the buyer may exercise only on the maturity date). Settlement is by delivery of "physical" share, and the five underlying stocks are all listed on the Taiwan Stock Exchange, so the question arises of how to ensure compliance with those provisions of the Securities and Exchange Law (SEL) restricting off-board trading of listed securities, those gov-erning transfers of shareholdings by company "insiders" (i.e. directors, supervisors, managers, and shareholders holding more than 10% of the company's total issued shares), and those regu-lating companies' buyback of their own shares as treasury stock.
The SFC states that it is still considering the third of these issues, but with regard to the first two it has already issued the following interpretations:
Article 150 of the SEL provides that trading in listed securities must be conducted through a stock exchange, except for (1) trading in gov-ernment bonds, (2) where due to statutory pro-visions, the parties may not acquire or dispose of ownership of the securities by trading on a cen-tralized market; (3) direct private transfers of securities in quantities not exceeding one trading unit and with an interval of at least three months between successive trades; and (4) in other cir-cumstances defined by the competent authority. To enable equity option contracts to be settled on maturity by delivery of physical shares, the SFC issued an interpretation on 23 January 2003, lifting the requirement under Article 150 of the SEL for listed shares to be traded only on a cen-tralized market in such circumstances.
On the question of insider transfer of share-holdings, and the reporting of holdings, when physical deliveries are to be done on exercising such options at maturity, the SFC stated in an interpretation dated 13 February 2003 that an insider should report the transaction in accor-dance with the provisions of Article 22-2 Para-graph 1 Item 3 of the SEL. In the case of equity options, "designated person" as referred to in Item 3 means the person designated by TaiFex as acquiring the underlying securities. The insider should deliver a report, in the form prescribed by the SFC, to his company and to the TSE or the GreTai Exchange by 5.30 p.m., and the transfer of shares should be completed within three days after the day on which the company enters the details into the Market Observation Post System (MOPS). An insider whose holdings of shares in his company change due to exercising an equity option must also report his holdings in accor-dance with Article 25 of the SEL.
The SFC's interpretation further states that when equity options are traded by (1) the spouse or underage child of an insider, or another person who holds them for the insider’s benefit, or by (2) the representative of a corporate director or su-pervisor, or the spouse or underage child of such a representative, or another person who holds them for the representative’s benefit, and shares are transferred to or by such persons due to the exercise of such equity options on maturity, the transfer of shares and the change in sharehold-ings must also be registered under Articles 22-2 and 25 of the SEL.