Legal Risks Facing Overseas Companies Listing in Taiwan - The prospectus as focal point

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When overseas companies come list shares in Taiwan, such companies’ negotiable securities (stocks, options, etc.) must be issued, offered for sale or traded in Taiwan. For this reason, these overseas companies must abide by Taiwan’s Securities and Exchange Act and related authorization rules and procedures. If overseas companies violate regulations pertaining to this Act, it could result in civil or criminal liability on the part of the companies themselves or the individuals in charge of them. Recently listed companies are likely to encounter one problem in particular, and that is legal liability under Article 32 of the Securities and Exchange Act (SEA) relating to misrepresentation in a company’s prospectus. The following explanations will attempt to elucidate this issue.

SEA requirements on the circumstances requiring preparation of a prospectus

Under Article 30 of the SEA, circumstances necessitating the preparation of a prospectus include where a company makes a public offering of, or issues, securities; and where a company applies to list shares on a stock exchange or have its shares traded over-the-counter. Consequently, all overseas companies that come to Taiwan for a market listing and then publicly offer and issue securities must prepare a prospectus and give out copies to investors.

Prospectus contents

According to the “Regulations Governing Information to be Published in Public Offering and Issuance Prospectuses”, drafted by the competent authority as authorized under Article 30 of the SEA, the contents of the prospectus must:

record matters specifically required to be recorded by law: These matters are mainly of two kinds – information pertaining to the issuing company and information regarding issuance plans – and the purpose is to provide investors the information needed to make informed investment decisions;
reflect the most recent conditions: All matters that occur before the prospectus is printed and which are capable of influencing investor decisions on trading or other matters must be disclosed, and the information must reflect the firm’s most recent financial and business development conditions; and
be clear and easy to understand: In preparing the prospectus contents, one must avoid using large amounts of professional jargon and other abstruse language, so that it can be easily understood by ordinary investors.

Legal liability for misrepresentation in a prospectus

Civil liability
Under Article 32 of the SEA, if the prospectus contains false information or omissions in its material contents, then the issuer, its responsible persons, and any employees of the issuer who have signed/affixed their seals to the prospectus (except for those having a cause for exemption of liability) will be held jointly liable with the issuer to any bona fide counterpart for the resulting damages. A so-called cause for exemption of liability refers to where:

-	a responsible person or employee can prove that he/she has exercised reasonable care, and that he/she has just cause to believe that the portions not certified by a CPA, lawyer, engineer, or other professional or technical person, have no false information nor omissions; or
-	a responsible person or employee has just cause to believe that the certification or the opinions rendered by such professional/technical person were accurate.

This provision applies absolute liability to issuers, since issuers are liable whether or not they can prove that they exercised reasonable care regarding the prospectus or had just cause to believe that its contents had no false information or omissions. As for the responsible persons or employees of the issuer, the scheme adopted is one of presumed negligence, with the burden of proof placed on such individuals. When responsible persons and employees cannot prove that they have one of the above causes for exemption, they will bear joint and several liability with the company for damages.

Criminal liability
The SEA (Article 174, paragraph 1, subparagraph 3) provides that where an issuer, its responsible persons or employees is liable for civil damages as described above (where no cause for exemption applies), they are to be punished with imprisonment for not less than one year and not more than seven years, and a fine of not more than NT$20 million may be imposed.

How overseas firms can manage the legal risk from prospectus misrepresentation

From the above, one can see that if an overseas company has information it should disclose in its prospectus but fails to disclose it, or if some of its disclosures do not conform to the facts, then it may be exposed to the risk of civil and criminal liability imposed by the Securities and Exchange Act. Moreover, since presumed negligence or absolute liability applies to that liability, there is a rather high probability that the issuer, its responsible persons and employees will bear joint and several liability with the company for damages. To manage this risk, the best approach is to make sure before the prospectus is provided that all the required information is disclosed and all the disclosed information is factual. Essentially, this involves the following four questions:

From a legal compliance perspective, what needs to be done to make sure the contents of the prospectus record the information that the Securities and Exchange Act and related regulations require be recorded, and which require that a company’s most recent financial and business conditions be reflected in a timely fashion prior to disclosure; which is to say, what degree of disclosure is necessary legally for them to be full and accurate?
From a legal compliance perspective, what needs to be done to make sure the contents of the prospectus accord with the facts?
Since the prospectus is a kind of marketing material as well as a legal document, for the issuer’s sake it seeks to showcase the strengths and downplay the weaknesses, while needing also to provide full and accurate disclosure of the issuing company’s condition. How can both of these objectives be achieved?
How can the language used in the prospectus meet the two broad objectives of being clear and easily understood on one hand and avoid possible legal liability issues on the other?

Given that the jurisdictions in which overseas corporations principally operate and are established are located abroad, Taiwanese underwriters cannot firmly grasp, as they would purely domestic underwriting work, the laws of jurisdictions where overseas companies are established and the legal risks stemming from their operations. Where the underwriters alone draft the overseas company’s prospectus, they are unable to control the compliance risk of the overseas companies, and the underwriters themselves would also be exposed to high levels of risk. In consequence, an overseas company should employ legal consultants with international underwriting experience to help in the preparations for a Taiwan market listing, and should have them review or join in writing the prospectus.

Exposure to excessive legal liability on the part of overseas firms, their responsible persons and relevant employees is a problem such firms must give special attention to when they plan market listings in Taiwan. Through three-sided cooperation and sharing of responsibility between the foreign corporation, the underwriters and the legal consultants engaged for the public issue, one can begin to manage preemptively the legal risks associated with the public listing prospectus while it is being prepared, and in so doing avoid exposure to high levels of legal liability.

The term "issuer" means either a company which publicly offers and issues securities, or promoters who publicly offer securities. (Securities and Exchange Act, Article 5)
The Securities and Exchange Act does not itself designate who the responsible persons are, but under article 2 it refers such matters to the provisions of the Company Act. Article 8 of the latter Act states that "responsible persons" denotes, in the case of a company limited by shares, the directors of the company, the managerial officer or liquidator of a company, or the promoter, supervisor, inspector, reorganizer or reorganization supervisor, acting within the scope of their duties.