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The Parliament approved on 12 December 2011 the amendment to the Securities and Exchange Act (the "Amendment") submitted by the Cabinet on 14 April 2010 and 26 October 2010. The Amendment was promulgated by the President on 4 January 2012.
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There are in total 26 articles added or amended. The major amendments are (1) applicability of the Securities and Exchange Act ("SEA") to foreign companies who list their securities on Taiwan stock market; (2) adoption of International Financial Reporting Standards ("IFRS") and relevant changes; (3) granting minority shareholders of a company listed on Taiwan Stock Exchange ("TWSE") or Gre-Tai Securities Market ("GTSM") with right to examine the company's records and/books; and (4) amendments to relevant penalties clauses. Other minor amendments are for the purpose of accommodating the current practice (e.g., listing, suspension of trading and delisting of securities previously subject to the review of the securities exchanges in the substance and the approval of the Financial Supervisory Commission ("FSC") will now, under the Amendment, be reported by securities exchanges to the FSC for verification) and for correcting the term used (such as change from Commercial Arbitration Law (which no longer exists) to Arbitration Act). We focus on the major amendments hereafter:
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Addition of Relevant Articles Relating to Foreign Companies
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A lot of modifications in the Amendment are related to listing of securities of foreign companies in Taiwan. Given the SEA imposes on the "issuer" or "company" the relevant criminal, civil and administrative liabilities and a foreign company is not a "company" as defined in Article 4 of the SEA which refers only to a company incorporated pursuant to the laws of Taiwan, there are concerns whether the SEA would apply to foreign companies in consideration of the principle of legality and the principle of legal reserve. Therefore, to strengthen the supervision of foreign companies and protect investors, the Amendment added the definition of foreign company and a new chapter (Chapter V-1: Foreign Companies) dedicated to foreign companies stipulating certain articles in the SEA that also apply to foreign companies as well as the applicable criminal and administrative penalties when a foreign company violates those articles of the SEA applicable to foreign companies.
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It is defined in the Amendment that a foreign company is a company incorporated pursuant to foreign law and for the purpose of making profits. A foreign company is not required to be recognized in Taiwan in order to offer, issue, sell or privately place securities. Since our Civil Code still provides that a foreign entity will not be recognized as having legal personality unless otherwise provided by law, it creates an awkward situation that a foreign company does not have legal personality, but can offer and issue securities, in Taiwan.
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There are three articles in Chapter V-1 (Foreign Companies), respectively governing foreign companies whose shares are not listed or traded on any foreign stock exchange and will be and are listed on TWSE or GTSM ("Primary Listing Companies") (Article 165-1), foreign companies who issue Taiwan Depositary Receipts ("Secondary Listing Companies") and branches of foreign financial institutions or affiliates of foreign companies who issue Formosa bonds ("Formosa Bonds Issuers") (Article 165-2), and designation of a litigious and non-litigious agent (the "LNL Agent") by foreign companies and the LNL Agent acting as the responsible person of a foreign company in Taiwan (Article 165-3).
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With respect to Primary Listing Companies, most of the articles in the SEA relating to issuer and its directors, supervisors, major shareholders, officers and employees (including penalties) are applicable to Primary Listing Companies except for certain articles which may contradict the laws of the place of incorporation of Primary Listing Companies (such as shareholding percentage of directors and supervisors, remuneration committee, issuance of employee stock options, preferred shares with warrants or bonds with warrants, or deadline of payment of subscription price for shares, bonds or certificates) or which are related to securities firms and stock exchange.
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With respect to Secondary Listing Companies and Formosa Bond Issuers, the SEA also enumerates the articles applicable to them, which are mainly focused on the offering and issuance of securities to be offered and sold in Taiwan, announcement of financial reports and their related penalties. The most important change from the present practice is that Secondary Listing Companies and Formosa Bond Issuers shall also publicly announce and file their quarterly report reviewed by CPAs within 45 days of the end of each quarter starting from the fiscal year of 2013. If the stock exchange in the place of original listing of Secondary Listing Company does not have the same requirement, the preparation of quarterly report will increase the costs and expenses of Secondary Listing Companies for maintaining the listing of their Taiwan Depositary Receipts.
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All of Primary Listing Companies, Secondary Listing Companies and Formosa Bond Issuers have to designate LNT Agents in Taiwan and according to the Amendment such agent will be the responsible person of the foreign company in Taiwan. This article would not have much impact on Primary Listing Companies and Formosa Bond Issuers, but may cause some difficulties to Secondary Listing Companies. Secondary Listing Companies normally do not have business operations in Taiwan, and their LNL Agents quite often do not have any relationship with the foreign companies. If these agents shall be responsible for the indemnifications resulting from the liability of untrue prospectus or financial reports (Articles 20-1 and 32), these agents would be bearing very heavy liabilities which are not equivalent to their remunerations and this would free the real responsible persons from liabilities. Although the Amendment added a new provision to Article 179 so that the real responsible person of the act will be responsible if the act of the foreign company is in violation of the SEA and hence subject to the penalties provisions of the SEA, this article is applicable to the penalty chapter and in most cases is limited to criminal and administrative sanctions. Given the above, how the new Article 165-3 would have any impact on the appointment of the LNL Agent remains to be seen.
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Adoption of IFRS
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The FSC has already planed to adopt IFRS for public companies in different stages starting from 2013. Therefore, the Amendment authorized the FSC to stipulate the preparation standards of public companies' financial report and exclude the application of Chapter 4 (Account Titles and Financial Statement), Chapter 6 (Valuation Basis) and Chapter 7 (Calculation of Profit and Loss) of the Business Entity Accounting Act by public companies.
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In addition, in order to accommodate the adoption of IFRS, based on international practice, the Amendment provides that financial report of each first quarter, second quarter and third quarter shall be reviewed by CPAs, approved by the board of directors and publicly announced and filed within 45 days of the end of each quarter. It is no longer required to file the half-year financial report and as the second quarter financial report shall only be reviewed instead of being audited as requested before for half-year report, the deadline for public announcement and filing is shortened from two months to 45 days after the end of second quarter. The amendment to the report period of financial report will not take effect until 2013.
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The Amendment also authorized the FSC to stipulate regulations to allow some flexibility in specific circumstances under which a public company makes a public announcement or files its financial report.
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Right of Examination of Minority Shareholders
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To increase protection of minority shareholders, in reference to Article 245 of the Company Act, the Amendment granted shareholders who continue holding 3% of the company's issued shares for one year or more with right to file application with the FSC to examine the issuer's books, records or other specific items if such shareholders believe specific event may have material damages to the company's shareholders' rights and interests. When an eligible shareholders makes such an application, he shall state his reason(s), describe the event and prove and explain the necessity of the examination. Further, in order to prevent minority shareholders from misusing this right to interfere with the company's operations, only when the FSC deems necessary upon application, the applicant shareholder may engage accountant, lawyer, engineer or other professionals or technical persons to conduct the examination. However, the fees incurred from the examination will be borne by the issuer. It is not clear right now what circumstances will constitute material damage to the company and will be subject to the future policy and practice of the FSC. The minority shareholders' examination right is also applicable to foreign companies.
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Amendment to Penalties Articles
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After the Amendment, if any foreign company or its relevant directors, officers or employees violate the applicable articles of the SEA, the relevant penalties provisions apply as well. In addition, any violation of certain provisions in Articles 171 and 174 of the SEA by foreign companies or their relevant directors, officers or employee will be deemed as the material crime under the Money Laundering Control Act. As such, knowingly disguising or concealing the property or property interests obtained from a material crime committed by oneself or others shall be deemed as money laundering and will be subject to the Money Laundering Control Act.
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The Amendment modified the clause relating to breach of duties by directors, supervisors or managerial persons and their misappropriation of company assets. Under the previous SEA, if a director, supervisor, or managerial person of an issuer acts contrary to his/her duties or misappropriates company assets, regardless of how serious of his/her act, Article 171 of the SEA would apply and such person would be subject to imprisonment of no less than three years and no more than ten years, and in addition thereto, a fine of not less than NT$10 million and not more than NT$200 million may be imposed. Taking into consideration the equity principle and in order to avoid minor violation being sanctioned with heavy criminal sentence, the Amendment added a new threshold amount for damage amount of the company reaching NT$5 million for application of this criminal sanction. If the damage amount does not reach NT$5 million, the violation will be subject to the sanctions under the Penal Code.
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In addition, based on the equity principle, the Amendment also increased the sentence of the criminal sanction for certain violations (e.g., the sanction for illegal offering, issuance and public solicitation of securities is increased from imprisonment of no more than two years to no more than five years) and decriminalized certain violations (e.g., failure of delivery of prospectus and violation of regulations relating to amount, period or percentage margin trading are not serious economic crimes and will be punished with administrative sanctions instead of criminal sanctions).
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