UMC CHAIRMAN ANNOUNCES RESIGNATION

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 005045

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 12/20/2015
TAGS: ECON EINV TW
SUBJECT: UMC CHAIRMAN ANNOUNCES RESIGNATION

REF: A. TAIPEI 1343


B. TAIPEI 1402

C. TAIPEI 1924

Classified By: AIT Director Douglas H. Paal, Reason 1.4 d


1. (SBU) Summary: United Mircoelectronics Corporation (UMC)
Chariman Robert Tsao announced December 29 that he would
resign in March 2006 after a public and shrill exchange of
accusations with Taiwan authorities over UMC's revised
earnings announcement earlier this month and alleged
insider trading by the firm's management. In addition,
Taiwan authorities continue investigations into whether
UMC's relationship with PRC foundry He Jian violated
restrictions on semiconductor investment in the PRC. Tsao
had previously threatened to resign over the He Jian case.
Tsao's resignation may help resolve some of the firms legal

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problems in a way that protects the interests of
stockholders. End summary.


2. (U) UMC Chairman Robert Tsao announced December 29 that
he would resign in March 2006. UMC is the world's second
largest contract manufacturer (foundry) of semiconductors.
Tsao's resignation comes after a public and increasingly

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shrill exchange of accusations with Taiwan authorities over
UMC's announcement of revised earnings earlier this month
and alleged insider trading by the firm's management.


3. (U) UMC announced a revised earnings report for 2004 on
December 14, which increased the firm's losses for the year
from NT$ 4.7 billion to NT$ 14.2 billion (USD 143 million
and USD 432 million respectively at current exchange
rates). The revision was made in response to a September
23 letter from the U.S. Securities and Exchange Commission
asking it to revise its reports. However, UMC released the
revised figures in the United States five hours before
releasing them in Taiwan, leading Taiwan's Stock Exchange
(TSE) to fine the firm NT$ 50,000 (about USD 1,500) for the
late disclosure, because it harmed the interests of
stockholders in Taiwan.


4. (U) In response, UMC purchased half-page ads that
appeared in several Taiwan dailies on December 28,
criticizing Taiwan financial authorities for their reaction
to the revision. The advertisement ended with speculation
that Taiwan was turning into a "country in disorder" (luan
bang) and stated UMC would consider delisting from the
Taiwan Stock Exchange and listing elsewhere. The same day
Taiwan's Financial Supervisory Commission (FSC) responded
by revealing that it was investigating UMC for insider
trading, claiming that UMC management sold shares in the
company before the revised loss figures were announced. A
TSE spokesman also publicly pointed out that UMC's actions

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would affect shareholders' views of the firm's credibility.
UMC's stock dropped 3.1 percent the day the ad appeared.
Legislative Yuan members from both the pan-green and pan-
blue camps criticized Tsao and UMC's handling of the
revision announcement.


5. (U) In addition, UMC faces continuing legal problems due
to its relationship with PRC foundry He Jian (reftels).
Taiwan's Ministry of Economic Affairs (MOEA) Investment
Commission and Hsinchu County Prosecutors Office are
investigating whether UMC violated Taiwan regulations that
restrict semiconductor investment in the PRC. UMC and He
Jian have acknowledged that UMC provided substantial
management assistance to He Jian, but claim that no funds
or technology was transferred and no Taiwan regulations
were broken.


6. (U) Taiwan's FSC fined Tsao in April for failure to
notify shareholders of its arrangement with He Jian. Later
in the month, UMC proposed that it be allowed to legalize
its investment in He Jian by taking a 15 percent stake in
the firm in exchange for its previous assistance. Tsao
purchased advertisements in June criticizing the government
over the handling of the UMC-He Jian case and offered to
resign if found guilty of illegally investing in the PRC.
The firm is still waiting for a response from the MOEA's
Investment Commission to its proposal to take 15 percent of
He Jian's stock as well as further word on whether
continuing investigations will result in additional
penalties.


7. (C) Comment: Tsao is one of Taiwan's most successful
business leaders, but has become increasingly
controversial. Another prominent Taiwan industrialist told
the Director that Tsao's problems began from poor habits of
corporate governance. Two others told him that Tsao's
mistakes have opened him to Chen administration vengeance
for his longstanding support of political rival Soong Chu-
yu. Tsao may have legitimate reasons to be frustrated by
the way Taiwan authorities have handled accusations against
UMC, but his resignation will likely help UMC overcome its
legal problems. It should end what appears to have become
a personal feud with Taiwan officials in UMC's name. It
should facilitate the Taiwan government's ability to handle
accusations against UMC's management in a manner that
doesn't unnecessarily harm the interests of UMC's
shareholders or cause excessive damage to one of Taiwan's
most prestigious firms.
PAAL