Insider trading regulations in Taiwan: a remark on recent developments.

• Author: Chen, Edgar Y.

This article originally appeared in the November 2011 Business Litigation Committee Newsletter.

1. General Background of Insider Trading Regulations in Taiwan

   Insider trading has been outlawed in Taiwan since 1988, when Article 157-1 ("Artcle157-1") of the Securities and Exchange Act ("SEA") was promulgated. (1) The statute defines insider trading as the purchase or sale of securities of a public company in an exchange or OTC market, upon actually knowing information with a material impact on the price of the securities of the company ("Material Information"), after the information is precise, and prior to the public disclosure of the information, or within eighteen hours of its public disclosure. (Emphasized terms were latest amended on June 2, 2010.) The ban in Taiwan mainly applies to three categories of persons: (1) Insiders: namely directors, supervisors, managerial officers and controlling shareholders (defined as holding more than ten percent of the share); (2) Constructive insiders: namely persons who have learned information by reason of occupational or controlling relationship, such as accountants, counselors and attorneys. (3) Tipees: persons who have learned the information from insiders. All violators are subject to severe criminal penalty (see below) and civil liability.

2. Ineffective Law Enforcement

   A thorough analysis of insider trading cases from 1988 to 2009 shows that the prosecution of Article 157-1 violations has been relatively unsuccessful. It generally takes three to five years for an insider trading case to be investigated, prosecuted and decided by a district court. (2) Meanwhile, only thirty six percent of the Article 157-1 cases that are prosecuted are eventually found guilty by district and higher courts. The figure is substantially lower than other criminal cases, of which the average conviction rates are between eighty eight to ninety six percent from 2000 to 2008. (3)

   The circumstances cause fierce twofold criticism against the government for its failure in prosecution of insider trading. The law has been criticized to be too lenient to deter illegal trading of securities, while at the same time too vague to prevent people from being falsely accused. (4) Hence in the past decades, the Legislative Yuan (the Congress) has amended Article 157-1 and its penal provisions three times to increase the penalties and clarify the scope of liability. When the ban first came into effect in 1988, insider trading was a misdemeanor. Imprisonment of less than two years was imposed for those convicted under the law. (5) But under current law, the offenders are subject to three to ten years of imprisonment and/or a fine of ten to two hundreds millions NTD (approximately three hundred twenty thousand to six and a half million USD). (6) How useful this approach of severing punishment may be in protecting market integrity is yet to be observed.

3. Controversies on Materiality and Intent

   Commonly invoked, and often successful, defenses in insider trading cases are the Defense of Materiality (arguing that the information lacks materiality) and Defense of Scienter (arguing that the defendant has no intent to use the information). (7) Each of the defenses involves legal controversies that courts' opinions split. It is thus worth reviewing the courts' rulings on these defenses with care. We summarize recent developments in each below.

   1. Controversies of Materiality

      Paragraph 4 of Article 157-1 provides a legal definition of materiality to be the courts' starting point. It defines material information as (1) information relating to a public company's financial...