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[Legal Issues] Winter 2013 Issue 2


 Duty to File Change in Ownership of Block Shares  

Sangmi Jo  프로필보기


With the recent increase in foreign investments in the listed-corporations in Korea, increasing number of foreign companies and investors has raised issues regarding the reporting duty and penalties related to the bulk ownership.Following the increasing inquiries, this issue will introduce the newly revised and amended regulation on the Duty to File Change in Ownership of Block Shares as well as the penalty for failure to such duty.

1. Reporting Duties on stocks, etc. held in Bulk

Under the Financial Investment Services and Capital Markets Act (“FISCMA”) Article 147 (1), A person who holds stocks, etc. of any stock-listed corporation in bulk (referring to a case where the aggregate of the number of stocks, etc. held by a person and his/her specially related persons1. reaches or exceeds 5% of the total number of stocks, etc.) shall report the status of stocks in hand, the purpose of holding, the essential details of the contract related to the stocks, etc. in hand, and other matters prescribed by Presidential Decree, to the Financial Services Commission and the Korea Exchange in a manner prescribed by Presidential Decree within five days from the date on which the person becomes a holder of the stocks in a such a quantity, and also report the details of a change, when there is a change in the aggregate of the number of stocks, etc. in hand to the extent of 1% of the total number of stocks, etc. or more to the Financial Services Commission and the Korea Exchange within five (5) days from the date on which such change occurs in a manner prescribed by Presidential Decree.

The duty to report was implemented in 1991 to heighten transparency of the market and to prevent hostile mergers and acquisitions (M&A). The ‘stocks, etc.’ includes securities issued by a stock-listed corporation, which are stocks, instruments representing preemptive rights to new stocks, convertible bonds, bonds with warrant, exchangeable bonds with a right to claim to exchange them with stocks, derivative-combined securities (limited to those with rights to acquire the underlying assets by exercising such rights).

2. Penalties for Violation of Public Disclosure Requirement for Stocks, Securities Holders

The authorities have established a new regulation on the penalty for violation of public disclosure requirement, which sentences to pay a administrative penalty of not more than 500 million Korean Won (FISCMA, Article 429-4; Implementation date: August 29, 2013); thereby if a person violates the public disclosure requirement, one shall be sentenced with a criminal imprisonment or a criminal fine {FICSMA Article 444-18: in the event of false statement, one shall be sentenced for an imprisonment of not more than (5) years or a criminal fine of not more than 200 million Korean Won; or Article 445-20: in the event of failure to report, one shall be sentenced for an imprisonment of not more than three (3) years or a criminal fine of not more than 100 million Korean Won} upon a choice of the relevant governmental authorities.

As the authorities have added new provisions on the administrative penalty for violation of public disclosure requirement, Financial Services Commission (“FSC”) announced the “Investigative Standards on the Capital Markets” (the”Standard”), which included details of the administrative penalty base amount, calculation method of the administrative penalty amount, etc. The administrative penalty base amount shall be calculated according to the total market value on the next day (if the relevant stocks have no market price, it shall be the date of the first transaction after that date) of the report (for false statement) or on the due date of the report (for non-submission); and the administrative penalty amount shall be calculated by multiplying the assessment rate by the above base amount. Moreover, in order for reasonable and rational administrative penalty system, the Standard establishes guidelines for determining the motive and consequence of the violation in relation to the disclosure/report duty.The motive of the violation shall be determined by considering two different categories of ‘investigative exposure’ and ‘self reporting’ (self reporting is when one submitted the report of shares but in violation due to delayed report, and etc.) and differentiated between intentional and negligent; as for the consequence of the violation, the Standard classifies into three different levels of provoking public criticism, significant, and trivial.

Additionally, in the event of violation of the duty to report rule, FISCMA restricts exercise of one’s voting rights for the stocks held in violation; among the stocks held in excess of 5% of the total number of outstanding voting stocks within a given period of time (FISCMA Article 150 (1)) and the FSC may issue an order to dispose of the portion held in violation within a period of time not exceeding six months. As to the gross negligence or intentional omission or false statement on the report, the period of time of restriction of exercise of one’s voting rights shall being on the day on which the relevant stocks were purchased and end on the day on which six months elapses after submitting such report; whereas violation of the rule due to pure error and mistake, the period of time shall begin on the day on which the relevant stocks were purchased and end on the day on which the report was submitted. (Enforcement Decree of FISCMA, Article 158)

Pursuant to the newly amended regulations on levied administrative penalty and related details, it is expected to heighten the transparency of the market and active protection of the investors upon faithful compliance of ‘the duty to report’ rule. Lee, Kim & Yoon has years of experience in working with many foreign investors and corporations that have invested in listed companies of Korea, assisting from general legal matters to disclosure requirement; for specific advice on these issues, or any other issues, please contact us, directly.


FN 1) ‘Specially Related Person(s)’ include both the joint holders and “those who have a special relationship as determined by Presidential Decree” (Article 141 (1), Enforcement Decree of the FISCMA) Please refer to Index, below.


[INDEX]

Specially Related Persons (Enforcement Decree of FICSMA Article 8)

Article 8 (Scope of Specially Related Persons)

The term “specially related persons, as defined by Presidential Decree” in Article 9(1) 1 of the Act means persons who fall under any of the following subparagraphs (“Specially Related Persons”):

1. Persons who fall under any of the following items, if the principal is a private individual:

(a) His/her spouse (including a person in a de factor marital relationship; hereinafter the same shall apply);

(b) A paternal relative in the sixth degree or closer and the wife of a paternal relative in the fourth degree or close;

(c) The husband of a paternal relative in the third degree or closer;

(d) A maternal relative in the third degree or closer, his/her spouse, and his/her child;

(e) A paternal relative of the spouse in the second degree or closer and his/her spouse;

(f) A lineal ascendant or descendant in the natural family of an adopted child;

(g) An adopted child, his/her spouse, and a lineal descendant in his/her adoptive family;

(h) The natural mother of a person born out of wedlock;

(i) A person who maintains a livelihood with the principal’s money or other property and a person who makes a living together with the principal;

(j) A corporation, an organization, and any executive of such corporation or an organization (an executive shall be excluded herefrom, if it is certified by the principal’s written statement, etc. that the principal alone or jointly with a person in a relationship under any provision of items (a) through (i) with the principal does not exercise de facto control over the matters material to the corporation or organization through appointment and dismissal of executives or in any other way) if the investment made in the corporation or organization by the principal alone or jointly with a person in a relationship under any provision of items (a) through (i) with the principal, reaches or exceeds 30/100 of its capital or the principal has, alone or jointly with such person, de facto control over the matters material to the corporation or organization, such as appointment and dismissal of executives; and

2. Persons who fall under any of the following items, if the principal is a corporation or an organization:

(a)An executive;

(b)An affiliated company under the Monopoly Regulation and Fair Trade Act (hereinafter referred to as the affiliated company”) and any of its executives;

(c)A private individual (including a person in a relationship under any item of subparagraph 1 with the individual), a corporation (excluding any of its affiliated companies; hereafter the same shall apply in this subparagraph), an organization and any executives of the corporation or organization if the investment made in the principal by the individual, corporation, or organization principal, alone or jointly with a person in a relationship under any item of subparagraph 1, reaches or exceeds 30/100 of its capital or the individual, corporation, or organization has, alone or jointly with such person, de facto control over the matters material to the principal, such as appointment and dismissal of executives; and

(d)A corporation, an organization, and any executives of such corporation or organization (an executive shall be excluded herefrom, if it is certified by the principal’s written statement, etc. that the principal does not exercise de facto control over the matters material to the corporation or organization through appointment and dismissal of executives or in any other way), if the investment made in the corporation or organization by the principal, alone or jointly with a person in a relationship under any provision of items (a) through (c) with the principal, reaches or exceeds 30/100 of its capital or the principal has, alone or jointly with such person, de facto control over the matters material to the corporation or organization, such as appointment and dismissal of executives.

 







Lee, Kim & Yoon was founded in April of 2007 by young and enthusiastic attorneys who have gained years of experience in corporate law and corporate financing at major law firms and multinational corporations in the heart of financial district in Korea, Yeouido. With the motto "adding value to your business", lee, Kim & Yoon has gained and developed trust and value over the years by representing many domestic and foreign multinational corporations in the areas of corporate, corporate finance, M&A, IPO, Litigation, and Foreign Investment. It is the belief of Lee, Kim & Yoon that the clients are best served when supported by highly dedicated attorneys providing acute legal knowledge at a cost-efficient and expeditious service.


 

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