Taiwan’s stock market regulator has launched a preliminary probe into apparent irregularities in the trading of shares in Chi Mei Optoelectronics before the announcement of its $5.3bn merger with local rival Innolux Display.

The deal, announced over the weekend, would create the world’s third-largest flat panel maker after South Korea’s Samsung Electronics and LG Electronics.

News of the probe emerged after trading in Chi Mei shares rocketed to between four and five times their normal volume in the two days before the merger was announced.

Some 142m shares changed hands on Thursday and the daily trading volume on Friday hit 184m, compared with an average daily figure of 34.7m during the first eight trading days of this month, local press reports said.

Taiwan Stock Exchange Corp has asked Chi Mei to explain why it issued a statement on Friday denying a newspaper report about a possible merger with either Innolux or AU Optronics. Chi Mei also denied on the same day that the group was in talks with Innolux.

The regulator on Monday refused to comment on the allegations of insider trading, saying only that the probe was ongoing.

Denis Chen, chief financial officer of Chi Mei, said: “We will co-operate with the investigation. We have done everything openly and above board and are not afraid [of scrutiny].”

Shares in Chi Mei on Monday rose by their 7 per cent daily limit to a five-month high on the back of news of the deal. Innolux shares, meanwhile, rose by 3 per cent.

Competition in the flat-screen television market is driving Taiwanese contract manufacturers to consolidate and take advantage of growing demand from China.

It is Innolux’s second such deal in as many months after it agreed in October to buy Toppoly Optoelectronics Corporation, another flat panel maker.

Hon Hai Group, the world’s biggest electronic manufacturing services company, owns 25 per cent of Innolux. Hon Hai wants to move from being a maker of personal electronic devices, into the higher-margin television sector.

Under the terms of the deal, Innolux, the world’s biggest assembler of flat-screen computer monitors, will offer one of its shares for every 2.05 Chi Mei shares.

Additional reporting by Chen Yu-ting in Taipei

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