Case Background
In 2009, Company A retained Securities Company B to handle securities underwriting for its initial public offering (“IPO”). A total of over 2,000,000 shares were to be subscripted through book building. The so-called book building is conducted by the lead underwriter through inquiring in advance the quantity and price of the shares of the issuing company at which legal persons, professional investors, and general investors are willing to purchase, so as to explore the price range of the shares of the issuing company in the market. The price range serves as a reference to negotiate the actual underwriting price with the issuing company.
According to Article 43-1 of the Rules Governing the Underwriting or Re-selling of Securities announced by the Taiwan Securities Association, persons having a substantial relationship with the issuing company or the underwriters are not allowed to participate in the placement of shares through book building, including the directors, supervisors, general managers, and department heads of the issuing company or the underwriters. Also, according to Article 2 of the Rules Governing the Placement of Shares through Book Building announced by the Taiwan Securities Association, underwriters should proceed with the book building in a fair and reasonable manner, giving priority to professional investment institutions or clients with certain transactional relationship.
Since the actual transaction price of Company A in the OTC market was much higher than the underwriting price agreed by Company A and Securities Company B, if one were to subscribe Company A's shares and sell them after the listing, an expected profit of around NTD 100 per share could be obtained. Therefore, the vice president and vice general manager of Securities Company B, along with other individuals, conspired with Company A's general manager, along with other individuals, to privately obtain a certain amount of share placement, reducing the actual amount of shares that Securities Company B could distribute. Participants from both companies were considered by the District Prosecutor's Office having violated the above rules and committed the crime of special breach of trust under Article 171(1)(iii) of the Securities Exchange Act.
It is illegal to place shares to individuals who should not legally receive them. However, Company A had fully received the capital and Securities Company B had earned the fees from the placement. What kind of damage did these two companies suffer? Regardless of whether it is breach of trust or special breach of trust, both are crimes of consequence. The company where the offender is employed must suffer damages for the crime to be established.
Courts’ Opinions
During the trial of the first instance, the court has appointed two accounting firms as expert witnesses to give testimony about the amount of damages in this case. Both the expert testimonies concluded that the Securities Company B did not suffer any damages. However, the courts in every instance did not follow the opinions of the two expert testimonies. Instead, the courts relied on the testimony of the vice general manager in the capital market department of Securities Company B, and determined that the amount of shares privately obtained by the offenders could have been placed to the influential clients that may benefit the future development of the company. What the offenders did affected the business volume of Securities Company B. The court of the second instance further indicated that this loss of expected future benefits should still be considered as damages.
As for whether Company A has suffered any damage, both the expert testimonies believed that the price determined through book building did not undervalue the share value of Company A and Company A did receive the full capital. In this regard, Company A did not suffer any loss. However, the stock price of Company A was declining six months after the incident. Expert testimony A believed that such decline would have a significant impact on Company A's operations and business image and result in a loss, although the loss could not be quantified. Expert testimony B compared Company A's stock price with Taiwan Securities Weighted Index and determined that the affected amount was NTD 170 million. If being compared with other public traded companies in the same industry, the affected amount was around NTD 12 million.
The court of the first instance followed the expert testimony B and directly determined that the amount of damages suffered by Company A had exceeded NTD 5 million, and the general manager, directors, and supervisors of Company A were convicted of the crime of special breach of trust under Article 171(1)(iii) of the Securities Exchange Act (see Taiwan Shilin District Court Criminal Judgment No. 110-Jin-Zhong-Su-Zi-6). However, the court of the second instance opined that the amount calculated in the expert testimony B could at most be considered a calculation of "market value" and could not serve as a basis for calculating the damages suffered by Company A (see Taiwan High Court Criminal Judgment No. 105-Jing-Shang-Zhong-Su-Zi-24). Nevertheless, as the stock price of Company A did decline and its goodwill was inevitably damaged, Company A clearly had a financial loss, although such loss could not be calculated with a specific number. It was doubtful to consider that the damages suffered by Company A had exceeded NTD 5 million. Hence, the court of the second instance convicted the offenders of the crime of breach of trust instead.
The Supreme Court, on the other hand, considered that the damages suffered by Company A were not entirely unquantifiable. As there was a possibility of quantification, the court of the second instance should have conducted an investigation (see Supreme Court Criminal Judgment No. Tai-Shang-Zi-3701). After the Supreme Court remanded the case, the court of the second instance still considered that these damages was difficult to calculate and concluded that the damages suffered by Company A did not exceed NTD 5 million (Taiwan High Court Criminal Judgment No. 107-Jing-Shang-Zhong-Geng-I-18). It is evident that although there was an expert testimony clearly stating that the share value of Company A was not undervalued and that Securities Company B did not suffer any damages, the court still considered that the damages existed by its own assessment. It should be noted that the decline of stock price, the damages to goodwill, the decrease in business volume, and the loss of expected future benefits could all constitute damages under the crime of breach of trust or special breach of trust.
(The article is originally in Chinese which can be found here.)