Shares of United Microelectronics Corp (UMC,
The stock slid as much as 2.9 percent after Tsao was charged on Monday with breach of trust and violating accounting law when helping He Jian Technology (Suzhou) Co (
Tsao should have sought payment for his company's services, prosecutors said.
Hsinchu-based UMC said that Tsao was trying to conform with the government's limits on China investments.
The indictment is the latest in rising tensions between regulators and the chipmaker, which last month threatened to leave Taiwan's exchange in protest over a fine for delays in disclosing accounting errors. Tsao, 58, quit on Monday, saying he wanted to become the focus of the probes to protect the company, whose customers include Apple Computer Inc and Xilinx Inc.
UMC's "corporate governance isn't that good," said Victor Shih, who helps manage the equivalent of US$2.4 billion at HSBC Asset Management Taiwan in Taipei. He said he holds shares in UMC's larger rival Taiwan Semiconductor Manufacturing Co (TSMC,
Chief executive officer Jackson Hu (胡國強) will take on the additional role of chairman so orders for UMC probably won't be affected, Shih said, adding that there are "improving fundamentals" for the industry.
The company said the charges are politically motivated.
John Hsuan (宣明智), 53, was also indicted and quit as vice chairman on Monday. The two executives could face prison terms of between six months and five years for the alleged violations.
UMC shares closed 1.6 percent lower at NT$18.55 on the Taiwan stock exchange. The stock has risen 2.3 percent in the past year, compared with a 44 percent gain in TSMC shares and a 13 percent rise in the benchmark TAIEX index.
"It's an uphill task for UMC to catch up with [its] rivals," said Warren Lau, an analyst at Macquarie Research in Hong Kong who has an "underperform" rating on the stock.
"Now there's a reshuffling of management that has yet to be proven in the highly competitive foundry industry," he said.
Taiwan limits investments in China on concern they may grab business and possibly steal advanced technology.
By providing assistance to another firm without compensation, managers had violated shareholder rights, the prosecutor said.
"UMC believes that the indictment of Tsao and Hsuan is of a purely political nature and caused by the special nature of the relationship between Taiwan and mainland China," the company said in an e-mailed statement.
The government is also investigating whether a planned acquisition of a 15 percent stake by UMC in He Jian violated the law.
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 UMC, and when the timing is appropriate they will agree to a merger of the two companies, Tsao said in a statement on March 21.
UMC isn't the only company to run afoul of the law. Last May the government fined Richard Chang (張汝京), founder of Semiconductor Manufacturing International Corp (中芯), China's biggest made-to-order chip supplier, NT$5 million (US$156,150) and told him to stop spending on advanced technology in China.