Tsao was charged with "breach of trust and violation of the business accounting law" after helping He Jian Technology (Suzhou) Co. to build a plant, win orders and improve management, Tsai Tien-yuan, a district prosecutor said in a telephone interview from Hsinchu, where United Microelectronics is based.
John Hsuan, who yesterday quit as vice chairman, was also indicted.
United Microelectronics, the world's second-largest supplier of made-to-order semiconductors, fell foul of laws designed to stop Chinese companies from grabbing business or stealing advanced technology from Taiwan. By providing assistance to another company without compensation, managers had violated shareholder rights, the prosecutor said.
"In theory they should be rewarded for their help, but they weren't, and this was unfair to UMC and its shareholders," Tsai said. He noted that the company supplied UMC manpower, management techniques, prospective clients, and confidential operating technology to He Jian without distributing any additional profit to UMC shareholders or disclosing this important project in UMC's financial statements.
The two executives could face a jail term of between six months and five years for the alleged violations, which took place in 2002, Tsai said.
UMC responded by saying that the indictments had nothing to do with Tsao and Hsuan's integrity and would have no impact on UMC, according to company spokesman Li Chi-tung.
The Taiwan government started a probe in February 2005 into relations between United Microelectronics and He Jian, based in Suzhou, north of Shanghai.
Taiwan Semiconductor Manufacturing Co., the world's biggest supplier of made-to-order chips, is the island's only chipmaker to have been given government approval to invest in China.
Taiwan's chipmakers are eager to start production in China to tap the growing market. China's semiconductor market grew by 32 percent last year to US$40.8 billion, overtaking the U.S. to become the world's largest, researcher IC Insights said in a report yesterday. The Chinese chip market may be worth US$124 billion by 2010, IC Insights said.
The indictment came as United Microelectronics's board of directors yesterday accepted Tsao's resignation as chairman. On December 29, Tsao said in a statement he planned to submit his resignation to the board in March so that "pressure being exerted by certain authorities can be focused on me."
Tsao made the statement on the same day the Taiwan's Financial Supervisory Commission said it was probing the company over share sales by managers before a December 14 earnings restatement.
Tsao and Hsuan, after leaving the board, were hired as "senior advisers" and may attend future board meetings, the company said yesterday in a statement to the Taiwan Stock Exchange. Tsao was given the title of "honorary chairman" and Hsuan was named "honorary vice chairman," the statement said.
UMC's Chief Executive Officer Jackson Hu was named Tsao's successor.
UMC on December 28 had threatened to delist from Taiwan's stock
exchange and move to "another, better market" to protest a fine for late disclosure. The exchange on December 16 fined the company NT$50,000 in December for reporting an earnings restatement in Taiwan five hours after disclosing it in the U.S.
"UMC will have to take time to explain to customers their strategy with a new chairman coming in and this may delay the qualification process for new orders by a month," Pranab Sarmah Kumar, a Hong Kong-based analyst at Daiwa, said in a telephone interview. "New potential customers may also adopt a wait-and-see attitude before making any commitments."
Daiwa cut the company's rating to "hold" from "outperform" on December 29 because Tsao's plan to resign had increased the company-specific risk profile and may hurt its valuation.Taiwan's government is also investigating whether a planned acquisition of a 15 percent stake by United Microelectronics in He Jian violated the laws on investment in China.
He Jian, China's fourth-biggest chipmaker, had pledged the 15 percent stake because the two companies previously had a verbal agreement that the Chinese company will provide "reasonable compensation" for assistance from United Microelectronics, and when the timing is appropriate they will agree to a merger of the two companies, Tsao said in a statement last March 21. There is no proof the 15 percent stake transfer has taken place, district prosecutor Tsai said.
Taiwan restricts cooperation by the island's chip companies on the mainland, including unapproved investment, transferring customers' orders and permanently moving employees.