On December 28, 2023, the National Assembly passed a proposed amendment to the Financial Investment Services and Capital Markets Act (the “Amended FSCMA”) requiring executives and major shareholders of listed companies (collectively, the “Insiders”)[1] to disclose in advance large-scale share transfers. The Amended FSCMA will take effect on July 24, 2024.
In connection with the planned implementation of the new disclosure requirement under the Amended FSCMA, on February 29, 2024, the Financial Services Commission (the “FSC”) issued a notice of the proposed amendment to the Enforcement Decree of the FSCMA, as well as an announcement of the planned amendments to (i) the “Regulations on Disgorgement of Short-Swing Profits and Unfair Trading Investigation and Report,” and (ii) the “Capital Markets Investigation Operations Manual” (collectively, the “Proposed Amendments”). The Proposed Amendments set forth (i) the Insiders and the type and size of transactions exempted from the prior disclosure obligations, (ii) the deadline for prior disclosure, (iii) the permissible scope of changes to the in-scope transactions that may take place after the prior disclosure, and (iv) grounds for withdrawal of the prior disclosure.
In consideration of frequent sharp drops in stock prices caused by the Insiders’ large-scale sales of listed stocks becoming a social issue, the new prior disclosure regime was introduced to require a mandatory prior disclosure of the sale or purchase of listed stocks by the Insiders, which currently is subject to only a post-disclosure requirement.
The details of the Amended FSCMA and the Proposed Amendments are as follows:
1.
Prior Disclosure Obligations
Under the Amended FSCMA, the Insiders intending to trade (purchase or sell) prescribed securities[2] issued by a listed company in excess of a certain threshold volume are obligated to disclose the transaction plan (e.g., the purpose of trading, price, quantity and trading period) a certain period (i.e., 30 days pursuant to the Proposed Amendments) before the transaction commencement date. Whether the transaction in question would be subject to prior disclosure obligations is determined by aggregating the transaction volume and amount for the past six months in order to prevent circumvention by executing several transactions below the threshold. The submission of multiple plans with overlapping transaction periods is not allowed.
2.
Exemptions from Prior Disclosure Obligations
To ensure that the new prior disclosure obligations do not place an excessive burden on the Insiders, the Amended FSCMA contains exemptions and other supplementary provisions and stipulates that details of the prior disclosure obligations shall be set forth in the Enforcement Decree.
The details of the parties exempted from the prior disclosure obligations under the Amended FSCMA and the Proposed Amendments are as follows.
Parties Subject to Exemption
- Domestic financial investors with a relatively high level of internal control standards who are not likely to misuse undisclosed information (e.g., pension funds, collective investment vehicles such as private equity funds (including special purpose companies), banks, insurance companies, specialized credit finance companies, financial investment businesses, venture capital firms, and the Korea SMEs and Startups Agency).
- Foreign investors equivalent to the domestic financial investors described above.
Transaction Size Subject to Exemption
- Small-scale transactions where the aggregate volume and amount of prescribed securities[3] traded over the past six months is (i) less than 1% of the total number of issued and outstanding shares of a listed company, and (ii) less than KRW 5 billion, respectively.
Type of Transactions Subject to Exemptions
- Inheritance, stock dividend, purchase and sale required under laws and regulations, tender offer, acquisition and disposition upon a split-up, merger of a company, etc.
In the case of small-scale transactions exempted from the prior disclosure requirement, both the trading volume and the amount must be below the threshold level (i.e., 1% of the total number of issued securities and KRW 5 billion, respectively). Therefore, a change in the transaction price from the expected price indicated in the disclosed transaction plan occurring after the prior disclosure has been made may result in a final transaction volume exceeding the threshold amount, thereby resulting in a breach of the prior disclosure obligations. As such, it would be prudent to take into account any change in the transaction price occurring after the prior disclosure has been made in order to avoid violating the disclosure obligations.
In addition, if an Insider who is not exempt from prior disclosure obligations (although the majority of financial investors would fall under the exemption) participates in confidential transactions, such as block deals, the information relating to such transactions may be required to be disclosed in advance. We advise companies to review the disclosure obligations relating to confidential transactions.
3.
Procedures and Methods for Disclosures
The Amended FSCMA and the Proposed Amendments set forth (i) the matters to be included in a transaction plan report that should be publicly disclosed, (ii) the deadline for prior disclosure, and (iii) the scope of permitted changes to the transactions following the prior disclosure.
The Amended FSCMA and the Proposed Amendments stipulate that the expected trading price, volume and trading period of relevant securities must be included in the transaction plan report, which should be disclosed at least 30 days prior to the transaction’s commencement date, considering the burden on the Insiders to make prior disclosures and the need to provide investors access to such information. In addition, after the prior disclosure, the Proposed Amendments allow changes to the transaction amount within 30% of the transaction amount stated in the disclosed transaction plan report.
4.
Withdrawal or Cancellation of Transaction Plans
The Amended FSCMA and the Proposed Amendments allow the Insiders to withdraw or cancel their transaction plans in limited circumstances, such as in the event of the death or bankruptcy of the filing party, delisting of the relevant listed company, suspension of trading and changes in market conditions. In particular, with respect to changes in market conditions, the Proposed Amendments permit withdrawal or cancellation of a transaction plan only where the price of relevant securities changes beyond ± 30% range of the closing price on the trading day immediately preceding the date the transaction plan report is disclosed.
5.
Sanctions on Violations
Under the Amended FSCMA, failure to disclose a transaction plan, the provision of a false disclosure, failure to execute a transaction plan and other violations of the prior disclosure obligations may result in an administrative penalty of up to 2/10,000 of the market capitalization of the relevant listed company but not exceeding KRW 2 billion.
The Proposed Amendments set forth detailed regulations for calculating administrative penalty amount based on a number of factors including a relevant listed company’s market capitalization, transaction amount, and severity of violation.
The FSC anticipates that the Proposed Amendments will enhance transparency and predictability of large-scale trades involving the Insiders, prevent unfair trading and promote the protection of general investors. The new prior disclosure regime is also expected to reduce unnecessary misunderstandings regarding the Insiders’ use of non-public information. However, concerns that the new prior disclosure regime may overly restrict the Insiders from exercising their ownership rights and, in some cases, could potentially lead to increased market volatility have been raised.
During the early stage of implementation of the prior disclosure regime, there may be some adjustments on specific regulatory requirements depending on the practical impact of its application. Therefore, companies are advised to take precautionary measures to ensure that the Insiders do not engage in any conduct that constitutes a breach of the prior disclosure requirements in connection with listed securities trading.
[1] In relation to the aforementioned “Insiders,” (i) The term “executives” refers to directors, auditors and employees with supervisory authorities, and (ii) the term “major shareholders” refers to those who hold at least 10% of the voting shares or exercise de facto influence over major management matters, such as the appointment and dismissal of officers.
[2] The prescribed securities include equity securities (including preferred stocks), convertible bonds, bonds with warrants and relevant depositary receipts.
[3] The prescribed securities include equity securities (including preferred stocks), convertible bonds, bonds with warrants and relevant depositary receipts.