Newsletter
AMENDMENTS OF SECURITIES AND EXCHANGE ACT
The amendments to the Securities and Exchange Act (SEA) were promulgated by the President on January 11, 2006 and effective (with exception described below) from the even date. The fol-lowing are the summaries of the major changes of this amendment:
I.Corporate Governance
Introduction of Independent Director
Pursuant to Article 14-2 of the amended SEA, a public issuing company may amend its arti-cles of incorporation to create independent directors within its board. However, the Fi-nancial Supervisory Commission (FSC) may, after considering the scale, shareholding structure and business of a public issuing company and other circumstance, require such public issuing company to elect not less than two independent directors or not less than one fifth of the total number of directors as inde-pendent directors (whichever is lower). The detailed rules for the mandatory election of independent directors by a public issuing company as may be requested by the FSC are to be prescribed by the FSC.
Under Article 14-3 of the amended SEA, a public issuing company that has elected in-dependent directors is required to have certain matters be submitted to its board of directors for approval, which is in line with local prac-tice generally.
Introduction of Audit Committee/Supervisor Double-Track System
Pursuant to Article 14-4 of the amended SEA, a public issuing company should either estab-lish an audit committee or elect supervisors; provided, that the FSC may, after considering the situation of practice, require a public is-suing company to establish an audit commit-tee to replace its supervisors. Given that the audit committee is a completely new system to Taiwanese companies which does not exist in the Taiwan Company Act, the FSC still needs to promulgate detailed provisions.
The audit committee should be composed by all of its independent directors and one of them should act as the convener of the audit committee; provided, that the members of the audit committee should in no event be less than three persons and at least one of its members should have expertise in the fields of accounting or finance. Resolutions of an audit committee should be adopted by a majority of its total members. The scope of the matters that must be submitted to the audit committee is prescribed under Article 14-5 of the amended SEA.
Independence of Directors and the Rules for the Meeting of the Board of Directors
Pursuant to Article 26-3 of the amended SEA, the number of directors of a public issuing company should in no event be less than five. In addition, unless otherwise approved by the FSC, the representatives designated by a corporate or government shareholder can no longer be permitted to hold the office of di-rector and supervisor in accordance with the second paragraph, Article 27 of the Company Act.
Also, unless otherwise approved by the FSC, (a) more than one half of the directors should not be spouse or parents, grand parents, chil-dren, grand children, brothers or sisters of an-other director; and (b) at least one supervisor should not be spouse or parent, grand parent, child, grand child, brother or sister of another director or supervisor.
In the event that the directors/supervisors elected in a shareholders' meeting are in vio-lation of the restrictions described in the pre-ceding paragraph, the effectiveness of their election should be determined in accordance with the following rules:
1.if such violation is a result of the relation-ship between or among the directors: the election of such directors with less votes should be deemed invalid so that there would be no violation of the foregoing re-strictions;
2.if such violation is a result of the relation-ship between or among the supervisors: the election of such supervisors with less votes should be deemed invalid so that there would be no violation of the foregoing re-strictions; and
3.if such violation is a result of the relation-ship between or among the supervisors and directors: the election of such supervisors with less votes shall be deemed invalid so that there would be no violation of the foregoing restrictions.
Where the directors/supervisors violate the foregoing restrictions after they are elected as directors/supervisors, the rules described in the preceding paragraph regarding the effec-tiveness of the election should apply mutatis mutandis for the discharge of such direc-tors/supervisors. If for any reasons certain directors are discharged and therefore the board has less than five directors, the suc-ceeding directors should be elected in the next shareholders' meeting to fill the vacancy; provided, that if the number of vacancies equals to or exceeds one third of the total number of directors prescribed under its arti-cles of incorporation, an extraordinary share-holders' meeting should be convened to elect the succeeding directors to fill such vacancies within 60 days after the vacancy occurs.
In order to strengthen the independency and operation of the board of directors, the amended SEA also requires a public issuing company to establish the rules governing the meeting of its board of directors. A public issuing company failing to establish such rules will be subject to a fine imposed by the FSC.
Grace Period for Requirements regarding In-dependent Director and Audit Committee
The foregoing requirements regarding (a) in-dependent directors or audit committee, and (b) the discharge of directors/supervisors due to unpermitted relationship apply after the expiry of the terms of offices of the current direc-tors/supervisors.
The abovementioned amendment described in this Section I (Corporate Governance) will not be effective until January 1, 2007.
II.Information Disclosure and Offering of Securities
Liabilities Regarding the Production of Fi-nancial Report
In order to ensure the accuracy of the financial and business information of a public issuing company its chairman, managers and the head of accounting department are required to sign or affix his/her seal onto the financial report and issue a declaration certifying that the fi-nancial report contains no untrue or incorrect information or omission. In addition, the head of the accounting department must meet cer-tain qualification requirements and attend relevant on-job training courses continually. The FSC is authorized to prescribe the rules governing the financial report and the quali-fication requirements and on-job training of the head of the accounting department.
Also, under Article 20-1 of the amended SEA, an issuer of securities, the responsible persons of the issuer and the employees of the issuer signing or affixing his/her seal onto the fi-nancial report or other financial/business documents are liable for the loss of buyers, sellers or holders of such securities with good faith arising from any untrue or incorrect in-formation or omission contained in the finan-cial report; provided, that the employees of the issuer signing or affixing his/her seal onto the financial report or other financial/business documents (other than the issuer and its re-sponsible persons) should not be liable for such loss if he/she can prove that he/she has exercised appropriate duty of care and has just causes to reasonably believe that there is no untrue or incorrect information or omission in the financial report or financial/business documents.
Also, if an accountant certifying a financial report or other financial/business documents conducts any inappropriate behavior or vio-lates or fails to perform relevant obligations when rendering his/her professional service, the accountant should be liable for any losses incurred therefrom. The employees of the issuer signing or affixing his/her seal onto the financial report or other financial/business documents and the accountant (other than the issuer its responsible persons) should com-pensate the relevant losses on a proportional basis in accordance with their respective re-sponsibilities in connection therewith.
Simplified Procedure for Offering of Securi-ties
Pursuant to Article 22 of the amended SEA, the approval procedure for an offering and issuance of securities is revoked. Therefore, the offering and issuance of securities in the future can be made after reporting the same to the FSC if the FSC raises no objection within a review period. The review period and other detailed rules for the reporting procedure is to be prescribed by the FSC.
III.Expansion of the Scope of Securities Firms' Business
In order to enable securities firms to expand their scale and diversify their business, certain re-strictions on the business scope of a securities firm and the investment made by a securities firm in other securities firm is removed from Article 45 of the amended SEA. In addition, for the flexibility of the underwriting system and the enhancement of the international competitivity of securities firms, the requirements in respect of the underwriting period, content of the under-writing agreement and submission of a copy of the underwriting agreement and the list of sub-scribers to the FSC have been deleted to be in line with international practice.
IV.Prohibition of Market Manipulation and Insiders Trading
Market Manipulation
Under Article 155 of the amended SEA, the following conducts are added as prohibited market manipulation:
1.the failure of a securities firm to perform its settlement obligations with the market (i.e., the failure of a securities firm to settle a transaction after the relevant sale/purchase offer reported by such securities firm to the market has been accepted by other trader); and
2.the "wash sales" made with an intention to create the impression of market activity by continually selling/purchasing certain secu-rities (in his/her name or the name of his/her nominee) to/from other persons associated with him/her through the market.
The provisions against market manipulation should also apply to actions that simultane-ously affect multiple shares, shares in certain sectors or the entire market (i.e., an act of market manipulation is no longer limited to that directly or indirectly affecting a specific security).
Insiders Trading
Article 157-1 of the SEA is amended as fol-lows:
1.the following persons are added as insiders of a public issuing company:
(a)individuals appointed as representa-tives by a government or corporate shareholder who are elected as director or supervisor; and
(b)former directors supervisors managers, shareholders holding more than 10% of the company's issued shares and other persons learning any price-sensitive information due to occupational or controlling relationship, for six months after they are discharged or lose such status or position,
2.a "cooling-off" period after the announce-ment of price-sensitive information is added. An insider can not buy or sell shares of the public issuing company "within 12 hours after the disclosure of relevant information"; and
3.the FSC is authorized to make regulations on matters relating to price-sensitive infor-mation, such as defining the scope of such information and the method of disclosure.
Increase of Fine
The minimum amount of the fine imposed against a violation of relevant articles of the SEA is increased from NT$120,000 to NT$240,000 in accordance with Article 178 of the amended SEA. In addition, the amount of additional fine imposed for each successive failure to comply with an order of the FSC is increased from not less than NT$240,000 and not more than NT$4,800,000 to not less than NT$480,000 and not more than NT$4,800,000.