Jessie Lee & Fang-Yu Wei, Managing Partner and Senior Associate of Formosan Brothers, Attorneys-at-Law

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The Securities Investor and Futures Trader Protection Act” (hereinafter the “Investor Protection Act”) has just been amended. The amended provisions, together with strict opinions of the Court on the crime of stock price manipulation and insider trading, due to conducts such as artificial inflation of stock price to stabilize the market (“market stabilization”), may result in one being unable to serve as a director or supervisor for extended period for an exchange-listed, OTC-listed, or emerging stock company. As such, one must be prudent with their stock purchasing actions. The following is a brief introduction to the amendment to Article 10-1 of the Investor Protection Act.

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First of all, the Company Act itself already provides that a person shall not serve as a director or supervisor of a company if he/she has been charged with specific criminal offenses and subsequently convicted and has not completed serving a sentence, or have not exceeded two years since the completion of serving a sentence or after the expiration of the probation.

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However, whether the directors and supervisors are qualified to serve in a public company has a significant impact on the investors’ rights. Therefore, the Investor Protection Act provides that the protection institution may petition with the court to dismiss a director or a supervisor of a public company if such personnel is found in violation of Article 155 or 157-1 of the Securities and Exchange Act (the stock price manipulation offense and the insider trading offense), or to be causing material damage to the company in the course of performing his or her duties, or in substantial violation of regulations or article of incorporation.  

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Moreover, according to the operational rules of the protection institution (i.e., the Securities and Futures Investors Protection Center, hereinafter the “Investor Protection Center”), the Investor Protection Center may  file an action for the dismissal of the director/supervisor of the company, if deemed to suffer substantial damage, at the time when the prosecutor just files the criminal charge and before the decision by the criminal court is rendered. (See Article 3 of the “Directions for the Handling of Lawsuits Involving Article 10-1 of the Securities Investor and Futures Trader Protection Act by the Securities and Futures Investors Protection Center”)

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This amendment to the Investor Protection Act further provides that if a director or supervisor is charged with the offense of stock price manipulation as prescribed in Article 155 of the Securities Exchange Act or insider trading as prescribed in Article 157-1 of the same and is subsequently dismissed from the company by a final civil court judgment in accordance with the aforesaid provisions of the Investor Protection Act, such a person may not, “within 3 years” from the date of the judgment, serve as a director or supervisor of any publicly listed company or as a designated proxy that represent such a director or supervisor in the exercise of duties under Article 27, paragraph 1 of the Company Act.

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In particular, some courts are strict in their interpretations of the offenses of stock price manipulation and insider trading. For example, some courts deemed that the act of “market stabilization” could constitute the offense of stock price manipulation; some courts deemed that the subjective purpose of the trading does not need to be considered – that is, even trading in the opposite direction could constitute the offense of insider trading (such as selling with the insider knowledge of the market being bullish). Under such strict interpretation and the aforesaid new provisions of the Investor Protection Act, for an extended period, one may be barred from serving as a director or supervisor of public companies due to his/her market stabilizing conducts.

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However, before the amendment of Investor Protection Act, there were some questions remain debatable in the civil court: if a director or supervisor of a public company is involved in stock price manipulation or insider trading conducts, is it only a matter of personal ethics irrelevant to his/her fitfulness for the positions as a director or supervisor? Isn’t it irrelevant to the ability for director/supervisor to run the company that such personnel perpetrates in “market stabilization” or insider trading as far as the company and shareholders are concerned? Do the “market stabilization” or insider trading fall in the definition of those elements prescribed in the old Article 10-1 of the Investor Protection Act which provides  “any conduct in the course of performing his or her duties that is materially injurious to the company”? Is the lawsuit for dismissal only applicable to conducts that occur in the current term? Indeed, this amendment to the Investor Protection Act has expressly provided that stock price manipulation and insider trading are statutory grounds for dismissal and are not limited to conducts that occurred in the current term. Although it is still debatable whether the amended provisions are reasonable, the court will follow such provisions until further amendment or constitutional interpretation being delivered. As such, one should pay special attention to the current provisions.  

As to the causes for dismissal, according to the new provisions, although they are not limited to conducts that occurred in the current term, the time frame is not boundless. There is still a term limit of “within 2 years from the time the protection institution learns of the cause for dismissal, or when 10 years have elapsed from the time of occurrence of the cause for dismissal.”

(This article was published in the Experts Commentary Column of the Commercial Times. https://view.ctee.com.tw/legal/24687.html )

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