Should Inotera Memories Apply for Trade Suspension?

Author: Marine Yang, translated into English by Colbert Hung

Rumour has it that the merger between Inotera Memories (Inotera Memories) and Micron Technology, Inc. (Micron) has come to a dead end in the past few days. There is also news on the capital market that Inotera has already announced the suspension of the merger with Micron internally. The message that the merger may possibly fail, in a media articledestructed the confidence of the entire market and resulted in the immediate limit-down of Inotera Memories’s stock price on Monday, June 13, 2016. The media coverage even pointed out that Taiwan Stock Exchange (“TWSE”) reached out to Inotera Memories before the opening on Monday, demanding Inotera Memories to explain the coverage by disclosing material information to the general public. However, Innotera kept delaying the announcement and soaked the market into the fog of fear. Inotera Memories did not upload the material information to the Market Observation Post System (“MOPS”) until the noon of Monday and only called for a public seminar at the evening to clarify that the merger was postponed rather than cancelled.

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That was supposed to be going up, wasn’t it? by Rafael Matsunaga is licensed under CC BY 2.0

Unsurprisingly, TWSE assessed Inotera Memories with a fine and claimed that “The announcement of Inotera Memories on June 8th concerning the postpone of the share swap transaction was determined (by TWSE) to be among the category that should be disclosed to public immediately according to Article 4(11) (of Ch.2) of the administrative regulation “Taiwan Stock Exchange Corporation Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities”. The delay of disclosure by Inotera Memories was in violation of the above regulation and posed significant impact upon its stock price, TWSE thus fined Innotera with NT$300,000 and inform the company to act in accordance with the rules in the future.

From any perspective, the information released by Micron was no doubt a piece of material information that falls within the regulation of the aforementioned administrative rule and Inotera Memories is in no circumstances allowed to have excuses for its late announcement. However, public’s questioning has never ended regarding why Inotera Memories did not actively apply for suspended trading, and Inotera Memories’s failure to do so led to the precipitous drop of the stock price and investor losses . Financial Supervisory Commission (FSC) expressed that there may be an “Inotera Memories clause” promulgated in the near future regarding the issue.

The new mechanism for suspended trading is implemented since January 15th this year. The system is aimed to disclose the material information that happens or being announced during the transaction hours and leave enough time for public awareness and investor reactions, thereby improving information asymmetry and fostering market fairness. One point, however, must be clarified that the materiality of the information that leads to trade suspension does not necessarily equal to the materiality of the material information announcement which may be issued by listing companies. Current legislation does not prescribe a specific rate or standard to quantify the materiality of suspended trading. There is also a lack of unified standard for measuring the material disclosable event. It is therefore inappropriate to link the fact that there is material information announcement with the necessity to apply for suspended trading.

According to the current regulation, trade suspension can be divided into two categories:

First: If any of the below events happen, the company shall apply actively for suspended trading.

  1. Serious decrease in output or suspension of work.
  2. Any event set forth in Art 185 of the Company Act except for those has no significant influence on the right of shareholders and the share price.
  3. Bankruptcy or reorganisation that is filed to the court.
  4. Merger or consolidation, division, acquisition, exchange or conversion of shares or transfer of shares from another, dissolution except for those prescribed in Art 18(7), Art 19(1), Art 29(6), Art 30(1), Art 36(1)(2), and Art 37(1) of the Enterprises Mergers and Acquisitions Act which does not require the resolution of shareholder’s meeting in proceeding or has no significant effect on the right of shareholders and the stock price.
  5. Major development progress on new products or technic, the complete of new product development, the mass production of newly developed products except for those has no effect on the right of shareholders and the stock price.
  6. Other events that has significant effect on the right of shareholders or the stock price.

The second category is when TWSE discovers from media coverage or other information sources that there is a material effect on the rights of the shareholders or the stock price of the company but the concerning company fails to give complete explanation of the material event, which leads to TWSE’s conclusion that trade suspension is necessary in order to protect the rights of shareholders or in accordance with the market need, TWSE may issue trade suspension on its own initiation.

Besides, according to TWSE’s FAQs, if the change is regarding details of the merger transaction, instead of the happening, cancellation or important change of the transaction, the company is not required to apply for suspended trading. The FAQs further stated that the change of effective date of merger is classified as the change of transaction details which does not call for the application of trade suspension. Based on the above standard, the case of Inotera Memories (if the transaction is mere postponed) does not require the application of trade suspension. Inotera Memories of course can apply for the suspension on the basis of “significant effect on the rights of shareholders and the stock price”. But the judgment and decision making seems inappropriate to be done by the concerning authorities. This may be the reason why TWSE has never actively announced trade suspension on its own since the mechanism came into operation.

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