It is interesting to note that in any court case having a tangent shadow concerning corporate governance (CG), each party will assert its acts are just following the principles of CG so that it does not violate any applicable law. It is still more interesting to learn that although each party in a lot of such court cases alleges its compliance with the principles of CG, the various courts do not comment much on what CG means, which acts follow or violate principles of CG, how the spirits of CG could be presented, where the disputes over CG are, when CG shall be serious dealt with, whether a case is directed to a resolution of CG and/or whose assertion in respect of CG is viable.
On August 26, 2009, Tao-Yuan District Court handed down its decision on a famous case involving inter alia inside transactions allegedly committed by top officials (TOs) of the reputed BenQ Corporation (BenQ) having once merged the telecommunication department of Siemens with scenarios outlined hereinafter.
The public prosecutor indicted that TOs established an offshore paper company, Creo, in Malaysia for receiving cash from selling the allocated remaining stocks belonging to the company assets but deposited under the names of 4 employees when the stock price was high, that such cash of Creo then served as a pretended foreign capital buying BenQ’s stocks at the low price for supporting the BenQ’s market stock price after the stock price successively fell down to the lower limit, and that TOs sold the stock shares to avoid losses of near NT$50 millions after knowing BenQ would have a heavy loss but before the announcement of the financial statements, although it is clear in the indictment that no penny from such cash was saved in any private account of TOs. BenQ corroborantly contended that an offshore account is a necessary expediency in absorbing the abroad elite and that all acts of buying and selling BenQ’s stocks in the name of Creo were for benefits of all BenQ’s employees.
Tao-Yuan District Court held that the allocated remaining stocks either belonged to TOs or were to be allocated to the abroad elite so that the disposition of those stocks had nothing to do with interests of the employees or shareholders, that it had been anticipated in the market that the acquisition of the telecommunication of Siemens would result in a heavy loss, through the publication of significant information in the Stock Exchange Information Observation Post and there was no other positive evidence to demonstrate there existed an inside transaction, that selling the stock shares by TOs after the announcement of acquisition of the telecommunication department of Siemens was a common judgment of the layman and had nothing to do with the inside transaction, that the allocated remaining stocks were sold between 20 January 2006 and 20 February 2006 when it was known there was a heavy loss in Q4 of 2005, but the financial statements of BenQ were not published until March 2006 and the spreadsheets in January 2006 and the ultimate audit results from accountants existed a significant difference so that the court could not determine defendants had known the lost amount and thus inside transaction could not be established, that on 16 March 2007, Creo sold 4,295 stocks only occupying 3.23% of 130 thousands of the total transaction on that day, which could not be held to have a significant influence on the transaction volume on that day, that all acts of selling and buying stocks were processed through following the authorization from the shareholder meeting of BenQ and found not damaging interests of the shareholders of BenQ, and that the personnel in the Stock Exchange is not a public servant and documents submitted by BenQ to the Investment Review Committee of the Economic Affairs and the Foreign Exchange of the Central Bank were not law-violating so that the forgery charge could not be established.
Although the decision by the Tao-Yuan District Court is subject to the appeal by the public prosecutor so that we could not know the ultimate outcome it might eventually turn out. From the above outlines, we could develop CG key issues under discussions as follows:
1. For stocks reserved for allocation for the abroad elite, although the interests of the amount increase or decrease of such stocks would not go to the private accounts, the results of selling such stocks or buying for such stocks are directly related to the company assets or interests of the shareholders. Accordingly, such transaction shall be regulated under the principles of CG no matter whether it is subjectively operated for the benefits of all employees.
2. Whether it is proper under the principles of CG to deposit relevant stocks or the company assets under the names of some employees wholly based on the decision of TOs without the involvement of the shareholder meeting?
3. While establishing an offshore paper company for pretending a foreign capital might help support the market stock price at a specific time period, it might adversely influence the company at another time period so that there might be a violation of the rules or spirits of CG.
4. While having known the company would have a heavy loss, even though the time is still before the announcement of the financial statements, would have established a prima facie case of involvement of the inside transaction, laws, rules or regulations need make it clear where the demarcation line resides under the principles or spirits of CG.
5. It might be clearly controversial for the Tao-Yuan District Court to have held against the CG spirits by taking that the disposition of the reserved stocks has nothing to do with interests of the employees or shareholders.
6. Whether a common anticipation in the market that an acquisition would result in a temporary heavy loss would free a later relevant stock transaction from the establishment of an inside transaction under the scrutiny of CG rules?
7. Under the CG principles, when TOs could optionally sell the stock shares without the potential accusation of the inside transaction?
8. Under CG, could a significant difference existing between the spreadsheets and the final financial statements or the ultimate audit results from accountants negatively demonstrate a possible inside transaction?
9. Under CG spirits, whether an involved transaction must be significant before considered to be illegal or inappropriate?
10. Under CG, what kinds of authorization from either the board of directors or the shareholder meeting would exempt liabilities of relevant acts?
In addition to the above-described issues directly derivable or apparent from the aforementioned notorious case, the following issues are also frequently raised for discussions or further legislation for better definition or compliance in respect of CG:
1. What is meant by significant information?
2. How or when is significant information established?
3. How one or the judge could find that a defendant is selling the stock after known to the significant information?
4. Who is an insider, a quasi insider, an information transmitter or an information receiver?
Still more, the independent director system was compulsorily implemented from January 1, 2007 for all chartered financial businesses of public issuance and all listed or OTC non-financial companies having a capitalization of more than NT$ 50 billions. The following questions are raised for discussions or considerations:
1. How is CG in those companies having the establishment of the independent director at the first stage operated?
2. Whether the implementation of the independent director at the second stage shall be initiated?
Taiwan is ranked as the fourth place in Asia in respect of CG. In order to perform better, it is suggested to replace the supervisor system with the audit committee having at least three members being independent directors, according to the Security Transaction Act, for all businesses having the establishment of the independent director at the first stage to then participate in the evaluation system of CG association. It is also suggested that new listed or OTC companies shall successfully acquire the assessment certification of CG associate in 3 to 5 years to prove the respective company does have a good CG. Furthermore, it is believed that incentives in respect of issuance of securities or upon the fundraising or supervision from Stock Exchange or OTC Trading Center might help the ultimate popular implementation of CG.