AMENDMENTS TO SEL EN-FORCEMENT RULES

09/01/2001

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In response to the most recent amendments to the Securities and Exchange Law (SEL), on 21 June 2001 the Securities and Futures Commission (SFC) announced, with immediate effect, amendments to the SEL Enforcement Rules. The main points of the amendments are as fol-lows:

Article 157 of the SEL provides that where a listing company's director, supervisor, man-ager, or major shareholder (10% shareholding or more), derives profits from short-swing trading in the company's shares, the company may claim for return of such profits; that is, the "right of recovery." A new Paragraph 6 was added to Article 157 to extend the scope of the right of recovery, to cover not only shares, but also other securities of equity na-ture. In response to that, the amended En-forcement Rules identify nine more types of such securities that will be subject to right of recovery: convertible bonds, bonds with war-rants, warrants, call and put options, certificate of subscription payment, certificate of sub-scription right, certificate of entitlement to new shares, certificate of entitlement of con-version right, and other securities with the nature of equity (Article 11, Paragraph 1).

With regard to the method of calculating the amount of recoverable profits, different rules apply to the trade in securities of the same type and in securities of different types (Article 11, Paragraph 2, Items 1 and 2):

1.Where the securities traded are of the same type: the highest selling price is paired with the lowest buying price, the second highest selling price with the second lowest buying price, and so on. The differentials of each pair should be aggregated and the aggregate amount will be the amount to be recovered. Any given pairing that represent a loss will not be added to the aggregate amount.

2.Where the securities traded are of dif-ferent types: for common stock, the actual trading price should be multiplied by the actual number of shares traded; for other types of securities, the trading price should be the closing price of common shares on the transaction date, multiplied by the number of common shares to which the securities should be entitled or convertible. The pairing calculation method is the same as described above.

In line with the amended Article 41 Paragraph 2 of the SEL concerning conversion of a company's capital reserve into paid in capital, Article 8 of the Enforcement Rules are amended as follows:

1.Maximum: where the sources of the capital reserve are from premium of shares issued, profits from the disposal of assets, or gifts received, the amount per year that can be converted into paid in capital is 10% of the company's aggregate paid in capital; where the source of the capital reserve is net gains from revalua-tion of assets, or the net value of assets assumed from a merged company, the maximum amount per year is 5% of the company's aggregate paid in capital.

2.Time: Any capital reserve that is derived from premium of shares issued, or the net value of assets assumed from a merged company, cannot be converted into paid in capital until the next fiscal year after the capital reserve is recorded.

3.Special provision for land incremental tax: if a gain from revaluation of assets is due to appreciation of land value, amount for paying relevant land incremental tax must be deducted before it is converted into paid in capital.

The latest amendment to the Enforcement Rules also includes "matters materially affecting shareholders' interests or securities prices." When they happen, public announcement and report to the regulatory authority must be made in accordance with Article 36, Paragraph 2, Item 2 of the SEL. They are: occurrence of precau-tionary proceedings or compulsory enforcement procedures that will materially affect the com-pany's business or financial condition; the exe-cution, alteration, termination or cancellation of material memoranda, strategic alliances or other business cooperation programs or agreements; commencement of commercial operation of ex-perimental products; and entry into transactions of intellectual property rights. The SEL requires such matters be publicly announced and reported to the SFC within two days after occurrence. In addition, listed companies must comply with the required procedures for verification and disclo-sure of important information, and for holding press conferences to announce important news. They must also disclose such information in the Stock Market Monitoring System.