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Public Companies Are Required to Announce and Register Material Contracts Which Were Executed Yet With Its Effectiveness Pending.

2021/12/10

Where a public company enters into an important contract, even if the contract has not yet been definitely effective due to certain reasons, the company shall still announce and register such important matter within two days from the date of the contract signing in order to comply with the provisions of the Securities and Exchange Act.

I. Provisions of Laws
1. According to subparagraph 2 of Paragraph 3 of Article 36 of the Securities and Exchange Act, if there occurs “any event which has a material impact on shareholders' rights and interests or securities prices” on a public company, the company “shall publicly announce and register with the Competent Authority within two days from the date of occurrence.” Moreover, Article 8 of the Securities and Exchange Act Enforcement Rules provides in regard to “types of event that has a material impact” by stating that if a company has any execution, amendment, termination, and rescindment of “important memoranda, strategic alliances or other cooperative business plans, or important contracts,” such matter is a matter requiring to be publicly announced and registered with the Competent Authority as provided in Subparagraph 2 of Paragraph 3 of Article 36 of the Securities and Exchange Act. For violation of the aforementioned provisions, the Competent Authority may impose a fine of not less than NT$240,000 and not more than NT$4.8 million, and if the company fails to make the correction within the prescribed period, consecutive fines may be imposed.
2. In addition to the aforementioned provisions, Article 4 of the “Taiwan Stock Exchange Corporation Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities” also prescribes 51 types of material information of listed companies for reference. However, this is a stipulation between a company and the Taiwan Stock Exchange Corporation. Any violation of this stipulation is a breach of contract and shall be subject to liquidated damages. It is not equivalent to an administrative liability as a violation under the Securities and Exchange Act.
II. Example 1: The representative of the company has signed a contract, but for some reason, the contract has not been effective. When should the company register such a contract?
If the representative of a company has signed a material contract (e.g., where the contract amount accounts for a certain proportion of the company’s assets) with the counterparty of the contract, but the contract signing has not been passed by a resolution of the board of directors and such circumstances has been known by the counterparty, or the contract is subject to conditions to take effect, making the contract yet to be effective immediately after signing. Under such cases, although it is still uncertain whether the contract will be effective or not, the company shall still announce and register it “within two days from the occurrence of the contract signing” in order to be compliant with the foregoing provisions of the Securities and Exchange Act. In addition, the aforementioned “announcement and registration within two days” is a provision of the Securities and Exchange Act; however, based on Article 6 of the “Taiwan Stock Exchange Corporation Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities,” a shorter period for registration is required. Companies should pay attention to such provisions to avoid breaching the contract.
III. Example 2: Following the example above, how shall a company register a material contract with its effectiveness pending?
Although a material contract that a company entered into may not be effective on the day of execution due to certain reasons, the company is still required to announce and register such an occurrence of contract execution so that the investors may have corresponding information for their investment judgment. However, the content to be registered should be noted with statements such as “this contract has not been approved by a resolution of the board of directors” to fully disclose the actual circumstances. Moreover, if later the important contract is certain to be terminated or invalidated, such changes shall be announced and registered accordingly.

IV.  Relevant cases for reference:
Taipei High Administrative Court Judgment 108-Su-Zi No. 1264
Supreme Administrative Court Judgment 109-Shang-Zi No. 941

(Author: Jin-Hong Tsai, Intern Attorney)

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