Paragraph 1 of Article 22-2 of the Securities and Exchange Act provides that, the transfer of stocks by the directors, supervisors, managerial officers, or shareholders holding more than ten percent of the total shares of a public company shall be registered with the competent authority. In addition, Paragraph 3 of the same provides that the obligation to register transfer of shares includes the shares held under the names of other parties. With respect to how “shares held under the names of other parties” are determined in individual cases, we can refer to the Administrative Supreme Court’s recent judgment 108-Shang-Zi No. 920.

I. Facts of the case
The Appellant of this case is the responsible person of a well-known investment holding company in Taiwan (the “Holding Company”), and the Holding Company owns 100% of a subsidiary (“Company A”). The ‘Holding Company appointed a representative to be a director of another well-known holding company in Taiwan (“Company B”). Company A transferred 30 million shares of Company B’s stocks that it owned, but the Appellant did not register such a transaction, and was therefore penalized by the competent authority, i.e., the Financial Supervisory Commission (the “FSC”).  (Note: as the responsible person of the Holding Company, Appellant should have caused the Holding Company to make such registration.)

The Appellant objected to such a penalty and filed an administrative action. The administrative action was dismissed by court of first instance. It then filed the present appeal. The main dispute of this case was how “shares held under the names of other parties” are determined.  

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II. Court judgment

The following is a brief summary of the court’s interpretation of “shares held under the names of third parties” in this case:

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1. Article 2 of the Securities and Exchange Act Enforcement Rules: The term "shares held under the name of third parties" means any person who satisfies the following qualifications
(1) Directly or indirectly provides stocks to third parties, or provides funds to third parties to purchase such stocks
(2) Be entitled to manage, utilize, or dispose the stocks held under the name of such third parties
(3) Be allocated the complete or partial portions of profits or losses of stocks held under the name of such third parties

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2. To determine whether someone has shares held under the names of third parties, one needs to observe the economic substance instead of the legal form or structural relationship. Hence, even though forming such a arrangement between an internal party and a third party is out of reasons of either the Company Act or other legal relationships, , the internal party’s statutory obligation to register the transaction cannot be waived.

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3. The Holding Company is a director of Company B. (Note: In Taiwan, a legal person can be elected as a legal-person- director having power to delegate a natural person carrying out the duty of director.)  The Holding Company owns Company B stocks using its 100% shareholding in in Company A. The Appellant failed to cause the Holding Company to register Company A’s transfer of Company B stocks, violating Paragraph 3 of Article 22-2 of the Securities and Exchange Act:

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The fund Company A used to purchase Company B stocks were directly or indirectly provided by the Holding Company. The profit or loss from Company A’s purchase of such stocks would increase or reduce the Holding Company’s net worth and such profit or loss would be attributed to the Holding Company. In addition, the only director of Company B was a director of the Holding Company. With respect to the business decisions about the personnel, finance, and operation of the subsidiary Company A, the Holding Company has the overall substantial control and dominating power, which meets the criteria provided in Paragraph 3 of Article 22-2 of the Securities and Exchange Act. However, before transferring the 30,738,000 shares of the Company B stocks which were held in the name of Company A (as fully-owned by the Holding Company), the Holding Company did not register such transaction with the FSC, violating Paragraph 3 of Article 22-2 of the Securities and Exchange Act.

From the aforementioned judgment rationale, it is therefore known, when it comes to determining whether some shares are shares held under the names of third parties, in addition to Article 2 of the Securities and Exchange Act Enforcement Rules, the court would also consider the economic substance observed as a basis for its judgment.

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(Author:  Zih-Ting You, Intern Attorney)

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