In insider trading cases where mergers and acquisitions (“M&A”) is involved, when should the material information become precise is closely related to the overall M&A process. Besides friendly takeovers, acquirers may also initiate hostile takeovers. After the Financial Supervisory Commission (“FSC”) promotes financial consolidation and allows qualified institutions to engage in hostile takeovers, hostile takeovers between financial institutions are expected to have more room for development. Whether the timing of when the insider information become precise should differ by different processes under friendly and hostile takeovers is worth discussing.　This article addresses this issue by the following two cases.　

Firstly, for friendly takeovers, in the acquisition of Hsinchu International Commercial Bank (“Hsinchu Bank”) by the Standard Chartered Bank (see Taiwan Taipei District Court Criminal Judgement No. 97-Jin-Zhong-Su-Zi-6, Taiwan High Court Criminal Judgement No. 100-Jin-Zhong-Shang-Su-Zi-59, Supreme Court Criminal Judgement No. 103-Tai-Shang-Zi-3220, Taiwan High Court Criminal Judgement No. 103 Jin-Zhong-Shang-Geng-Yi-Zi-14, and Supreme Court Criminal Judgement No. 106-Tai-Shang-Zi-1503), the acquisition processes in sequential included: initial negotiations between representatives by both parties, signing non-disclosure agreements, the acquirer issuing a merger offer, proceeding due diligence, entering into exclusivity agreements, commencing three rounds of negotiations, the acquirer's board approving the acquisition, modifying the merger offer, target company's majority shareholders agreeing to sell but requesting for a higher price, the target company convening an executive board meeting, the parties negotiating the public announcement schedule, signing trust agreements, and obtaining FSC's approval for proceeding the tender offer. In friendly takeovers, the acquirer and the target company have chances to work closely, fully communicate, and finally reach a consensus on key merger conditions, including the price and quantity of the acquired shares. In general, when the information that could significantly impact the stock prices or influence reasonable investors' investment decisions become precise, insiders with specific identities should not take advantage of such information and trade.　　

In the acquisition of Hsinchu Bank by the Standard Chartered Bank, different courts ruled differently on the timing of when the information became precise. The district court and the high court held that when both parties agreed on the price, the information became precise. However, the Supreme Court ruled otherwise that besides the price, there were other conditions for the Standard Chartered Bank to commence the acquisition of the Hsinchu Bank, such as whether the Standard Chartered Bank could: acquire more than 51% of Hsinchu Bank's equity, obtain Hsinchu Bank's overseas transferable corporate bonds in advance, and secure the consent of Hsinchu Bank's majority shareholder. After the case was remanded to the high court, the high court decided that the information became precise when the responsible person of Hsinchu Bank's majority shareholder contacted the CFO of the Standard Chartered Bank and agreed to sell all the Hsinchu Bank's shares. As a result, one of the convicted defendants was acquitted. This decision was upheld by the Supreme Court.　

Secondly, for hostile takeovers, in the acquisition of Taiwan International Securities Co., Ltd. (“International Securities”) by China Development Financial Holding Corporation (“China Development”) (see Taiwan High Court Criminal Judgment No. 99 Zin-Shang-Chang-Su-Zi-61 and Supreme Court Criminal Judgment No. 104-Tai-Shang-Zi -720), the acquisition processes in sequential included: internal discussions at the management department of China Development on the acquisition proposal and methods, China Development's board approving the acquisition, obtaining approval from the FSC while contacting with International Securities' management team to explore the possibility of the acquisition, and International Securities' management team taking defensive measures (engaged in M&A with Global Securities Financial Corporation, First Securities Incorporation, and Far Eastern Securities Incorporation). In hostile takeovers, the parties typically would not undergo stages such as proceeding due diligence, commencing rounds of negotiations, or reaching consensus on crucial merger conditions. In deciding the timing of when the information should become precise, the court held that before China Development's board approved the acquisition and obtained FSC's approval, it is doubtful to consider that the information on the acquisition of the International Securities by the China Development was precise. According to the court's ruling, in hostile takeovers, the timing of when the information should become precise may not precede the acquirer's board resolution or FSC's approval.

Observing from other processes under hostile takeovers, it could be seen that in contrast to friendly takeovers where the parties usually negotiate and communicate closely, the target company under hostile takeovers often refuses to negotiate or unable to reach an agreement with the acquirer. The target company may also claim that the acquisition would not succeed or discourage shareholders from selling their shares. Whether the takeover succeeds or not often depends on whether the majority shareholders are willing to sell their shares. Consequently, in hostile takeovers, the timing of when the information should become precise would not be those timings under friendly takeovers where the target company agrees to the acquisition or the parties reach a consensus on key merger conditions, including the price and quantity of the acquired shares. Instead, the court would determine such timing by considering other factors such as the timing of FSC's approval, the acquirer’s board resolution, FTC's approval or the majority shareholders of the target company unilaterally agreeing to sell their shares.

Considering the differences between friendly and hostile takeovers, during the investigation stage, it is important to consider those differences and decide the timing of when the information should become precise. In future insider trading cases, whether the court’s opinions on the timing of when the information should become precise would be narrowly tailored to the differences between friendly and hostile takeovers still remains to be seen.

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