In Supreme Court Civil Judgment No. 111-Tai-Shang-Zi-21, the Supreme Court held that “considering Taiwan Securities Exchange Act does not provide special provision for damages caused by financial statements fraud, the general tort liability in the Civil Code shall apply, including the compensation for damages and the principle of restitution under Article 213 of the Civil Code. The allocation of the burden of proof should still be governed by Article 277 of the Code of Civil Procedure.

Therefore, the U.S. laws regarding (1) applying causal assumption for the cause of damage (in Basic Inc. v. Levinson, driven by class actions, the U.S. court developed the "Fraud-on-the-Market Theory" based on the efficient market hypothesis, assuming causality between investors' transactions and the misinformation); (2) victims bears the burden of proof for the foreseeability of the cause and scope of damages (as stipulated in the Private Securities Litigation Reform Act of 1995 (15 U.S.C. §78u-4(b)(4), S.21D(b)(4) of the Securities and Exchange Act)); or (3) limiting award of damages by the mean trading price of the security during the 90-day period beginning on the date on which the misinformation is corrected (Section 21D(e) of the Securities and Exchange Act of 1934), shall not apply directly or by analogy, or serve as reference when interpreting Taiwan laws.”

Considering principles in (2) and (3) above derive from U.S. statutes, it may be difficult for them to apply directly in Taiwan in the absence of similar Taiwan statutory provisions. However, the Fraud-on-the-Market Theory in (1) above comes from U.S. court decisions. The Supreme Court's position on whether such theory should not or could not apply in Taiwan, or may apply  by finding the proper statutory base is open for discussion.

Although under the U.S. laws, the Fraud-on-the-Market Theory is developed from class actions, its core concept is that investors rely on the market price for their investment decisions. Therefore, if a company misrepresents or omits material information that causes the market price unable to reflect the true value of the security, investors may seek damages based on the differences between the trading price and the true value of the security. In other words, investors are entitled to compensation without proving that they have read the misrepresentation in the financial statement.

In fact, in Supreme Court Civil Judgment 104-Tai-Shang-Zi-225, the Supreme Court once recognized the Fraud-on-the-Market Theory by holding that “when there is misrepresentation to the financial statement of the company issuing the security, the average investors are unable to discover the truth through the public market. It would be impractical and unduly burdensome to require investors to prove the causality between the misrepresentation in the financial statement and their losses. Therefore, by referencing the Fraud-on-the-Market Theory from U.S. laws, Article 277 of the Code of the Civil Procedure could be interpreted as, so long as the bona fide investors could prove that the misrepresentation in the financial statement by the company was enough to affect the stock price, the investors purchased stocks without knowledge of the misrepresentation, and the investors suffered losses after the stock price dropped, the court should assume the causality between the misrepresentation and the investors’ losses.”

It remains to be seen if the Supreme Court intends to completely reject the Fraud-on-the-Market Theory through Supreme Court Civil Judgment No. 111-Tai-Shang-Zi-21. The Supreme Court does not explicitly overturn its previous rulings in such judgement. The holding in such judgement stating “damages caused by financial statements fraud under Taiwan Security Exchange Act…and the allocation of the burden of proof shall still be governed by Article 277 of the Code of Civil Procedure” corresponds with the holding in the Supreme Court Civil Judgment 104-Tai-Shang-Zi-225, in which the Fraud-on-the-Market Theory was recognized through interpretation of Article 277 of the Code of Civil Procedure. These facts suggest that the application of such theory is not baseless in Taiwan legal system. Until the Supreme Court explicitly overturns its previous rulings, it would be inappropriate to conclude that there is no place for the Fraud-on-the-Market Theory under Taiwan laws.

(The article is originally in Chinese which can be found here.)