The observance of the duty of care and fiduciary duty by directors in determining the appropriate terms and size of remuneration for officers of listed companies has emerged as a crucial aspect of corporate governance. Minority shareholders, such as activist funds and minority shareholder associations, are also increasingly raising concerns about excessive officer remuneration.

In this regard, stock-based compensation expanding beyond traditional stock options has recently gained popularity. This compensation model uses methods such as disposal of treasury shares to directly provide officers and employees with company shares, or their monetary equivalent based on specific conditions, like tenure or performance, and encompasses various structures including restricted stock, performance stock, stock grants, and phantom stock, among others. Market participants and companies are actively discussing how to ensure appropriateness of these models and whether they require disclosure.

As previously discussed in our newsletter (Link), the Financial Supervisory Service (“FSS”) announced on December 19, 2023, amendments to several forms, effective at the end of 2023, including (i) regular reports including business reports, (ii) reports on major facts, (iii) reports on the status of stocks, etc., held in bulk, and (iv) reports on the status of specific securities, etc., owned by officers. Additionally, in the first half of 2024, the FSS will conduct inspections to assess the disclosure status of stock-based compensation by companies, and take necessary measures, such as instructing companies to voluntarily correct any deficiencies in their disclosure.

In addition to these actions, the Korea Fair Trade Commission (“KFTC”) amended the disclosure manual for large business groups on April 16, 2024. This amendment introduced a new disclosure requirement, mandating that stock award agreements (e.g., restricted stock) be specified in the “Securities Transactions with Related Party” section among the items disclosed regarding the status of the business group. Consequently, starting from this year, information such as (i) grant date, (ii) type of agreement, (iii) type of stock, (iv) number of stock shares, and (v) other key terms of any stock award agreements executed with a related party (e.g., founder family members, officers) in the preceding business year must be disclosed annually.

Stock award agreements encompass agreements designed to compensate for performance achievements through the awarding of stock shares, whether they are termed as stock grants, restricted stock units (“RSUs”), or restricted stock awards (“RSAs”).

According to the KFTC, its amendment aims to rectify the limitations of the current disclosure form in addressing concerns over the potential misuse of stock award agreements by founder family members to increase their shareholdings. Specifically, the existing form only requires that the selling price be indicated when stock shares are actually awarded to related parties, and fails to disclose any details of stock award agreements executed by respective business groups. With the new requirement for disclosing stock award agreements, key details such as the conditions for stock award, the quantity of shares to be awarded, and other pertinent information will be available at the time of agreement execution. This applies not only to stock grants and RSAs, where shares are awarded upon agreement execution, but also to RSUs, where shares are awarded upon meeting specific conditions (i.e., vesting). Consequently, disclosures will encompass changes resulting from these stock award agreements, including alterations in shareholding by founder family members and potential shifts in the shareholding structure.

The amended disclosure manual will be published on the KFTC website, and in May, will be incorporated into the disclosure form on the FSS Data Analysis, Retrieval and Transfer (“DART”) System. Companies affiliated with a business group subject to the disclosure requirement must adhere to the new disclosure manual, commencing with the 2024 annual disclosure and the first quarter (Q1) disclosure (by May 31, 2024) for public disclosure of the business group’s status. For disclosure of major facts of non-listed companies, the new manual will be immediately applicable upon the implementation of the new form on the DART System.

With the heightened disclosure requirement, companies are now obligated to disclose additional information under the Monopoly Regulation and Fair Trade Act, in addition to the disclosure mandated for listed companies under the Financial Investment Services and Capital Markets Act. Of particular significance is that this new requirement extends not only to listed companies but also to non-listed companies affiliated with business groups. Hence, we strongly advise companies to exercise caution when adopting, implementing, and disclosing stock-based compensation for officers and employees within large business groups.

[Korean Version]