Duty of Disclosure: Comparison of Securities Regulations between U.S. and S. Korea by Cases in Bio-Pharmaceutical Industry

Abstract

This paper introduces the concept of false and misleading statements or omissions regarding companies in the bio-pharmaceutical industry, based on court decisions. Due to essential problem of stock market, “asymmetry of information,” if company’s public statements about material information are not trustworthy, investors who purchased the company’s shares might lose their assets, and the confidence in and the soundness of the stock market would be damaged as a result. This paper attempts to clarify violations of §10(b) of the Securities Exchange Act of 1934 and the corresponding rule of the Securities and Exchange Commission, 17 C.F.R. §240.10b-5 (“Rule 10b-5), particularly, (1) a material misrepresentation or omission, and (2) scienter through reviewing recent cases of bio-pharmaceutical companies, Aratana case and Chelsea case. In the Republic of Korea, Hanmi Pharm’s caserepresents how the late public announcement or omission would affect investors’ half-baked decision and damage the stock market by insider trading. Pursuant to §391 of the Financial Investment Services and Capital Market Act, Korea Exchange announced a law “Negative Disclosure Regulations on Material Information,” on May 2, 2016. Nevertheless, the regulation does not appear to be effective guideline for investors and stock market. In the proposed scienter tests, this paper introduces ImClone stock trading scandal to represent the relatively easy scienter case in the bio-pharmaceutical industry. Also, this paper illustrates two hypothetical cases, Brandon Therapeutics, Inc. in the United States, and Hoon Biosimilar Co., Ltd. case to suggest the better solution to solve scienter cases in the bio-pharmaceutical industry. In conclusion, this paper compares both American and Korean cases and related regulation, and then proposes a supplement that will promote a sound stock market.