In the previous section we talk about how independent directors functions in Taiwan. Minority shareholders need the protection from the independent directors in order to maintain a minimum level of protection. Another important vehicle for the minority shareholders to ensure their minimum protection will be the investor protection center that I want to share with you in this section. This is actually a very innovative design in Taiwan which I could say that it is very special even on world scale. So let me introduce you how the investor protection center functions in Taiwan. As we mentioned before Taiwan is a corporate governance environment that features the concentrated ownership structure. To that extent, Taiwanese corporate governance problem is on how to ensure or how to prevent the related party transactions between the controlling shareholder and the company. If a controlling shareholder conduct some unfair related party transaction with the company, typically that would involve some financial misstatements. Because typically those related party transactions would involve some unfavorable terms for the company. To conceal those malpractice, they have to write a wrong financial statements. So typically the controlling shareholder will collude with the management team to prepare a misstatement. So in order to protect the minority shareholder, we need to have a tool to prevent the management team, the controlling shareholder, or even the board of directors from making financial misstatement. And this has to do with one of a very important legal vehicle that is called the securities litigation. Under the Securities Exchange Act of Taiwan, companies and any persons are not allowed to make financial misstatement. Otherwise, investors can claim damages against the persons who make the financial misstatements. In addition to the civil liability, these persons that make financial misstatements can also be involved in criminal liability. So we need a litigation mechanism to pursue such civil and criminal liability and that has to do with the investor lawsuit. Theoretically, investors are permitted to bring these legal actions against the persons who make financial misstatements, be it the controlling shareholder, the manager, or the board of directors. But in practice, people are not that motivated to do that. Assuming that you are a retail investors of a company and assuming that you know that this company is making a misstatement, would you dare or would you try to sue against those people? No, you won't do that because launching a litigation is very costly and you only hold a limited amount of shares. Those litigation costs can never be enough to cover your recovery from that investor lawsuit, so investors face a serious collective action problems. Collectively speaking, investors should bring these lawsuits because a lot of investors suffer from this financial misstatements. But individual speaking, no individual investors would be willing to take the lead and this is very rational because any individual investors would find it costly to bring such lawsuit. Bringing investor lawsuit would not be cost effective, therefore, you rarely see investor lawsuit. In some jurisdictions, for example in the United States, the way for them to overcome this collective action problem is the so called plaintiff lawyers. United States has very, very strong lawyer system and lawyer market. A lot of lawyers are willing to take a lead to collude all the investors to consolidate the investors claim so as to avoid this collective action problem. So these lawyers are willing to do so because, well, they can receive lawyer fee if they win the lawsuit. So they are motivated to do that and they are capable of consolidating the investors. So that makes the United States a very robust investor lawsuit jurisdiction. But that is not typical, for the rest of the jurisdiction you rarely see such a robust investor lawsuits system. So for most of the jurisdictions, in order to impose enough discipline upon the management team, they have to resort to another way, that is a public way. If private investors are not motivated enough to bring a lawsuit to discipline the management, then we have to resort to the public way, be it the administrative agency or the criminal prosecutor. So for a lot of jurisdictions, prosecutors actually play a huge role in pursuing such investor lawsuit. So they raise criminal claim against the management team who made the financial misstatements and they somehow impose the discipline on the management team. But there is a loophole here. So for this public way to function, you need to have a very robust public system. You need to trust your administrative agency or you need to trust your criminal prosecutor. Well, in a lot of jurisdictions, public officials are not as capable as private lawyers and again public officials are not motivated to do these. For private lawyers, they are motivated because they can receive lawyer fee. But for public prosecutors or for administrative agency, they do this simply to perform their public function or public duty, but, well, this is not motivated enough. So gradually you will see that the public way functions less satisfactory as opposed to the private way. So each way has its own defect and all the jurisdiction are thinking how to strike a balance between the two. What are the potential alternatives to the traditional public way or private way? That is a question mark. In Taiwan, we managed to find out a very interesting way that is a public private mix. We come up with the so called investor protection center. This center is actually a foundation. It is a private organization, so it is a foundation, but its funding comes partly from the private side and partly from the public site. So according to the investor protection laws, we require some private entities like district companies or securities firms to sponsor the investor protection center. And at the same time, the government also pays some funds to the investor protection center. So this makes the investor protection center a public and private mix. Private in the sense that it is a foundation. It is a non profit organization and its funding comes partly from the private side. In addition, it is private because it does not have the public power to enforce the laws. Instead, it is like a private institution which can only bring private lawsuit, civil lawsuit against the person who make financial misstatements. So those private lawsuits are basically pursuing civil liability against the person who make the financial misstatement. And this investor protection center is not a public entity, so it does not have the investigation power like a prosecutor or like the administrative agency. It also does not have the power to mandate the victim investors to entrust them. So private investor can choose to sue the persons making financial misstatements on their own, but they can also choose to entrust the investor protection center to bring the lawsuit. That is how we call it an opt-in system, an opt-in class action. Investors can opt to join this class action and entrust the investor protection center. To that extent, this is a very private oriented organization, but on the other hand, it is also public oriented. Public in the sense that first of all, its funding comes from the public, at least partially from the public. And another major public element of the investor protection center is that its manager, its directors, the person who runs the investor protection center are basically appointed by the government, especially the financial regulator of Taiwan. So to some extent or to a large extent, this investor protection center works like a public entity. People working there are delegated or appointed by the government, so they have a very close tie with the regulator. And because they are appointed by the government, they work in the interest of the government. So they are very public interest oriented as well. Even more, they do not charge attorney fee or lawyer fee, so this is a non-profit organization. So to that extent, it is a very public entity as well. So this public private mix makes the investor protection center a very special creature around the world. We rarely see this kind of design in other places and this is one of the Taiwan's characteristics. So we also have laws giving some regulatory privileges to this investor protection center in order to allow it to bring more actions against the management team. So for example, for a private investor to launch a derivative action against management team, they typically has to hold a significant amount of share, but that is not available to the investor protection center. So investor [rotection center does not have to hold a significant amount of shares so as to have a standing to bring a lawsuit against the management team. In practice, the Investor protection center only hold 1,000 shares of each listed companies. That makes it the shareholder of all the district companies in Taiwan. But that's all, it doesn't have to hold a significant amount of share, you can think of it as a budget concern. And also for a private investor to bring a lawsuit against the management team, typically they need to furnish some security in order to prevent some abusive lawsuit. But since the investor protection center has some public element, our laws trust that the investor protection center will not bring abusive lawsuit. So they are not required to furnish any security in order to petition for the provisional attachment or injunction. And they also does not need to furnish any security for its petition for the provisional enforcement. These are all the regulatory privileges awarded by our laws to the investor protection center. To that extent, you can see that investor protection center has a better position to bring the class action for the investors to protect the interests of the retail investors. But some people on the other hand would argue that this also squeeze the opportunity for other private law firm to enter into this businesses. So a lot of private law firms have to be subject to such regulatory requirements while the investor protection centers are free from that. To that extent, the competitive advantage is awarded against the private law firms and this somehow prevents Taiwan to develop the private way of addressing these issues. To some extent, investor protection center becomes a monopoly of the investor class actions. And we can only rely on its efficiency and effectiveness in bringing the lawsuit and pursuing the liability against the management team. So let us take a look at its performance. So starting from 2003, investor protection center started to pursue the securities fraud liability against different listed or over the counter companies. So in the past 15 years, basically they have pursued 122 cases which have already been closed and 123 pending cases. So in sum there are around 250 cases launched by the investor protection center. And in terms of their winning chance, you can see that out of the 122 closed cases, they have won 49 cases there. Not that good, but it's okay, right? So at least it did something and it achieved something. And the amount that they have claimed for the investors has reached $4.90 billion. And in addition to the securities fraud actions, recently the IPC, the investor protection center is also pursuing derivative actions and dismissal actions against the management team. Pursuing their breach of fiduciary duty or even try to dismiss the board of directors of the company and they have achieved some progress as well. So you can find the figure here from this slide. So in sum, the investor protection center works not that bad, but not that good. So it's mediocre, but it's okay compared to the lack of private ways and lack of efficient public ways to pursue the liability. So the investor protection center becomes a very special existence in Taiwan's capital markets.
