An amendment to the Financial Investment Services and Capital Markets Act (the “Amended FSCMA”) was promulgated on January 23, 2024, to require the prior disclosure of insider transactions. Specifically,if any executive or major shareholder of a listed company (an “Insider”) intends to buy or sell “Specified Securities” issued by the company (which include equity securities (e.g., stocks), convertible bonds, bonds with warrants and related depository receipts) in an amount exceeding a certain threshold, they must disclose information about the transaction in advance of the scheduled trading date. In line with the Amended FSCMA, corresponding amendments were made to the following: (i) the Enforcement Decree of the FSCMA (the “Amended FSCMA Enforcement Decree”), (ii) the Regulations on Disgorgement of Short-Swing Profits and Unfair Trading Investigation and Report, Etc. (the “Amended Short-Swing Profits Regulations”), and (iii) the Capital Markets Investigation Operations Manual (the “Amended Investigation Manual”) on July 9, 2024. These amendments, along with the Amended FSCMA, entered into force on July 24, 2024 (collectively, the “Amended FSCMA Regulations”).

Since the Financial Services Commission’s announcement in September 2022 (available in Korean, Link), the Amended FSCMA Regulations have been under continuous discussion due to market concerns over potential declines in stock prices from large-scale insider sales. Below, we have outlined key details about the prior disclosure requirement for insider transactions involving listed companies under the Amended FSCMA Regulations.

With the implementation of the prior disclosure requirement for insider trading, any Insider who intends to buy or sell Specified Securities issued by that company in an amount exceeding a certain threshold must disclose the purpose, price, volume and period of the transfer at least 30 days prior to the scheduled trading date.

  1. Scope of Insiders Subject to Prior Disclosure Requirement

Executives and major shareholders of listed companies are classified as Insiders subject to the prior disclosure requirement. Here, “executives” include not only directors and auditors, but also de facto executives, such as those responsible for giving work orders; and a “major shareholder” is defined as any shareholder who (i) holds at least 10% of the shares in the listed company, or (ii) has the power to exert de facto influence over the management of the company (Article 173-3 (1) of the Amended FSCMA).

However, financial investors who are expected to (i) have a relatively higher level of internal control standards, and (ii) be less likely to misuse material non-public information (such as pension funds, collective investment vehicles (e.g., 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) are not subject to the prior disclosure requirement. Furthermore, in order to ensure the equal treatment of domestic and foreign investors, foreign investors with a status equivalent to domestic financial investors are also excluded from being subject to the prior disclosure requirement (Article 200-3 (1) of the Amended FSCMA).

  1. Scope of Transactions Subject to Prior Disclosure Requirement

The prior disclosure requirement applies when an insider subject to the requirement buys, sells or otherwise trades Specified Securities issued by the relevant listed company (which include equity securities (e.g., stocks), convertible bonds, bonds with warrants and related depository receipts) (Article 173-3 (1) of the Amended FSCMA).

The reporting requirement is exempted when the aggregate trading volume and value of the Specified Securities over the six months prior to the start date of trading and during the trading period are both (i) less than 1% of the total number of issued and outstanding shares of the listed company, and (ii) less than KRW 5 billion.

Furthermore, the prior disclosure requirement does not apply to instances where transactions are executed for unavoidable reasons. These include situations (i) where there is no risk of misuse of material non-public information, including when the sale or purchase of shares is inevitable due to a statutory requirement, or is intended for stabilization or market creation,[1] and (ii) where transactions are conducted as a result of external factors, such as succession/inheritance, share dividends, mergers and acquisitions involving the transfer or acquisition of shares, acquisitions or disposals of shares due to split-ups or mergers, or covering (or reverse trading) due to a decrease in the collateral value of shares.

  1. Procedures and Method of Prior Disclosure of Insider Transactions

Specifically, the parties subject to the prior disclosure requirement must specify the (anticipated) trading amount, price, volume and period of the Specified Securities to be traded in their transaction plan reports. This information must be reported to the Securities and Futures Commission and the Korea Exchange, and publicly disclosed at least 30 days before the trading commences (Article 173-3 (3) of the Amended FSCMA, Article 200-3 (3) of the Amended FSCMA Enforcement Decree, and Article 9-4 of the Amended Short-Swing Profits Regulations).

As the transaction plan must be reported 30 days before the commencement of the transaction, the reporting requirement applies to transactions for which payment is made on or after August 23, 2024 (and which are executed by floor trading on August 21, 2024), which is 30 days after the effective date of the amended FSCMA (July 24, 2024).

In addition, a party who has previously reported a transaction plan is not permitted to report a new one until the implementation of the previous plan is completed (Article 173-3 (2) of the Amended FSCMA). In principle, parties subject to the prior disclosure requirement must trade the Specified Securities in accordance with the transaction plans they reported. However, the Amended FSCMA allows the transaction amount to deviate by up to 30% from the amount specified in the transaction plan, providing flexibility to the parties in responding to changing market conditions (Article 173-3 (3) of the Amended FSCMA and Article 200-3 (6) of the Amended FSCMA Enforcement Decree).

  1. Unavoidable Circumstances in Which Transaction Plans May Be Withdrawn (Article 173-3 (4) of the Amended FSCMA, Article 200-3 (7) of the Amended FSCMA Enforcement Decree, and Articles 9-6 and 9-7 of the Amended Short-Swing Profits Regulations)

A transaction plan may be withdrawn under unavoidable circumstances, such as (i) the death or bankruptcy of the filing party, (ii) a significant amount of loss anticipated due to increased market volatility (i.e., where the relevant stock price changes by 30% or more from the closing price of the day preceding the reporting date of the transaction plan), (iii) the impossibility of executing a sales or purchase transaction due to reasons attributable to the counterparty, or (iv) rapidly changing market conditions (e.g., the delisting of the relevant company, a suspension of trading, etc.) after the submission of the transaction plan.

  1. Administrative Fines for Violations of Prior Disclosure Obligations for Insider Trading (Articles 429 (5) and 429 (6) of the Amended FSCMA, Articles 379 (6) and 379 (7) of the Amended FSCMA Enforcement Decree, and Attached Table 2-3 of the Amended Investigation Manual)

Failing to disclose or falsely disclosing a transaction plan, failing to implement the relevant transaction plan, or any other violation of the disclosure obligations, can result in an administrative fine of 0.02% of the listed company’s market capitalization, up to KRW 2 billion maximum. The Amended FSCMA Enforcement Decree includes detailed provisions allowing administrative fines to be imposed differently depending on certain factors, such as market capitalization, trading amount and the severity of the violation.

The purpose of enforcing the prior disclosure requirement for insider trading is to enhance the transparency and predictability of large-scale insider transactions, thereby preventing unfair trading practices and safeguarding general investors. For insiders, including major shareholders, the prior disclosure of substantial share sales can help mitigate the risk of raising unnecessary suspicions about the use of non-public information in these transactions.

For major shareholders, however, there may be a number of factors to take into account when reviewing transaction structures for large-scale share trading. As major shareholders are now required to disclose information about their large-scale transactions in advance, they will inevitably be exposed to the risk of stock price fluctuations from the date of disclosure until the date of transaction.

It is also worth noting that under the Amended FSCMA Enforcement Decree, transactions of institutional investors (e.g., private equity funds), mergers and acquisitions, and transactions for corporate restructuring (e.g., acquisitions or disposals of shares due to split-ups or mergers) are exempt from the prior disclosure requirement.

https://www.kimchang.com/en/insights/detail.kc?sch_section=4&idx=30461

Footnotes

[1] Where, exceptions to the disgorgement of short-swing profits apply mutatis mutandis under Article 198, Subparagraphs 1 through 12 of the Amended FSCMA Enforcement Decree.

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