According to the news, the defendant in this case intervened in the management of Company A during 2013 and  acquired three seats of directors and one seat of supervisor (the total number of seats of directors and supervisors was nine and two) at Company A’s re-election of its directors and supervisors in May 2013. The defendant thus became the majority shareholder of Company A. In the same year, to expand the scale of its insurance business, Financial Holding Company B (“Company B”) proposed to merge with Life Insurance Company C (“Company C”). Since Company A directly and indirectly owned more than 36% of the shares of Compnay C , and was the majority shareholder of Compnay C , the attitude of Company A was the key to the success of the merger.

However, the merger in 2013 ("First Merger")  failed due to the defendant’s boycott in his capacity as the majority shareholder of Company A. In 2015, the defendant agreed to reopen the merger between Company C  and Company B ("Second Merger") on the ground that: (1) Company A would not be able to adequately finance Compnay C if Company C is required to increase its capital due to its insufficient capital adequacy ratio; and (2) the life insurance industry has very strict restrictions on cash dividends. Even if dividends are issued, the company is still subject to tax.  This would not only bring no benef to Company A in the long run, but also would cause Company A to suffer losses. Finally, on May 12, 2015, the boards of both sides  approved the Second Merger in the form of share swap. Company C thus became the wholly-owned subsidiary of Company B.

As investigated by Taiwan Taipei District Prosecutors Office, during the  negotiation of the Second Merger, the defendant, along with others, has purchased 26,105,000 shares of Company C with a total of NT$480 million before the announcement of Company B was confirmed to acquire Company C. The defendant subsequently sold such shares and made an unlawful profit of more than NT$180 million. The defendant was therefore prosecuted for insider trading in accordance with Article 157-1, Paragraph 1 of the Securities and Exchange Act. Regarding what kind of insider trading entity the defendant should be in this case, the courts of the first and second  instance held slightly different views, which are as follows.

The first instance court, i.e., Taiwan Taipei District Court Criminal Judgement No. 105-Jin-Zhong-Su-Zi-8, opined that the defendant, after boycotting the First Merger and causing its failure, took the lead in reopening the Second Merger. Although the defendant was not the nominal director of Company C, he had substantially controlled the major business decisions of Company C by takind advantages of the fact that Company A was the majority shareholder and the director of Company C. The defendant was actually the "de facto director" of Company C. Secondly, the court considered defendant the shareholder with more than 10% of shareholding because the defendnat, via Company A, has substantively controlled over 36.77% of the shareholding of Company C. In addition, the court indicated that the defendant has only acquired three seats of directors out of nine and one seat of supervisor out of two of Company A. Having said, in the event that a merger requires special resolution to approve, the defendant’s voting power already had a "substantial influence" on Company A, which is the majority shareholder and director of Company C. Since the defendant was able to control the development of the merger of Company C, the defendant should be the “person who recieves information based on the controlling relationships.” With the above three reasons, the court considered that the defendant should have constituted insiders under Article 157-1, Paragraph 1, subparagraph1 (director of the company), subparagraph 2 (shareholder with more than 10% of shareholding), and subparagraph 3 (person who receives information based on the controlling relationship) of the Securities and Exchange Act.

After the case was appealed to the second instance court, Taiwan High Court Criminal Judgement No.108-Jin-Shang-Zhong-Su-Zi-35 still recognized the defendant as an insider trading entity. However, the reason was slightly different. The second instance court held that the defendant did not actually carry out the business of a director of Company C, nor did he substantially direct the Company C’s directors by controlling the personnel, finance or business operations of Company C. The defendant was therefore not a "de facto director" under Article 8, Paragraph 3 of the Company Act. In addition, there was insufficient evidence to recognize that the funds by Company A to purchase of the shares of Company C was directly or indirectly provided by the defendant. The 36.77% of shareholding of Company C held by Company A could not be included in the defendant's ownership. Therefore, the defendant was not the "shareholder with more than 10% of shareholding."

The second instance court further stated that although the defendant only acquired three seats of directors and one seat of supervisor of Company A without holding 100% of the shareholding or more than half of the voting rights to achieve the degree of "complete control," the defendant was able to control the operation of Company A and its important policies by merely exchanging interests or making compromises with other directors and supervisors. Since Company A is the majority shareholder of Company C with over 30% of the shareholding and holds more than two-thirds of the board' seats, the defendant is able to indirectly exert a high degree of dominant influence over Company C's general personnel, financial, business operations, and even the major business decisions like merger through Company A. Therefore, the defendant should be regarded as “person who recieves information based on the controlling relationship“ under Article 157-1, Paragraph 1, subparagraph 3 of the Securities and Exchange Act.

To summarize, in practice, the applicable scope of "person who receives information based on the controlling relationship" is broad. Even though the defendant in this case did not directly serve as the director or any other internal position in the target company or hold any shareholding in the target company, the defendant can still "indirectly" exert a high degree of dominant influence over the target company by becoming a “majority shareholder of the majority shareholder” of the target company. That case, the defendant should still be quailified as insiders of Article 157-1, Paragraph 1, subparagraph 3 of the Securities and Exchange Act.

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