1.

Enhanced Disclosure Requirement by FSS for Stock-Based Compensation for Officers and Employees of Listed Companies

Stock-based compensation that goes beyond traditional stock options has recently gained popularity. This compensation model uses methods such as the 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 a wide array of structures including restricted stock, performance stock, stock grants and phantom stock.

Concerning the foregoing, the FSS announced via its press release dated December 19, 2023 (available in Korean, Link), amendments to several forms (effective as of the end of 2023) including (i) regular reports such as business reports, (ii) reports on key facts, (iii) reports on the status of stocks held in bulk, and (iv) reports on the status of specific securities owned by officers, to ensure that the information on companies’ stock-based compensation is sufficiently disclosed. The FSS also announced that it would conduct inspections in the first half of 2024 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 disclosures.

Specifically, regarding the above mentioned (i) regular reports, in the annual report and semi-annual reports’ “Remuneration for Officers” section, the FSS requires a company to specify, for each share-based compensation plan, (a) the name, (b) the basis and procedure, (c) the number of persons to be awarded/paid and the number of shares to be awarded, (d) the terms and conditions of payment (vesting), (e) the number of shares to be paid and/or unpaid, and (f) whether the share transfer restriction period is applicable (only disclosing the overall situation of the share-based compensation plan rather than the details of the award/payment to each individual). In addition, in cases of share-based compensation transactions with major shareholders (excluding stock options), the “Transactions with Major Shareholders” section must specify the details of the transaction for each major shareholder with whom a transaction is conducted.

In addition, on the above mentioned (ii) reports on key facts (e.g., acquisition/disposal of treasury shares), the FSS requires that a company, upon deciding to acquire or dispose of treasury shares in order to pay share-based compensation, must state the purpose of the share-based compensation in the “Purpose of Acquisition/Disposal” section. Key details, such as the name of the compensation plan, the number of persons to be paid, the number of shares to be paid, and the terms of payment (vesting) must also be outlined in detail in the “Other Matters to be Considered for Investment Decision” section.

Furthermore, concerning (iii) reports on the status of stocks held in bulk (“5% reports”), by amending the guidelines for the preparation of disclosure forms, the FSS clarified that once the executives and employees satisfy the payment conditions (vesting conditions) for stock-based compensation and consequently their rights to receive voting shares are confirmed, their status falls under “holding equivalent to ownership” even if they have yet to receive the shares, thereby triggering the obligation to report on large-scale holdings (through “5% reports”).

As to (iv) reports on the status of specific securities owned by officers and major shareholders (“10% reports”), the FSS stipulates that if executives and major shareholders of a listed company who received stock-based compensation in the form of Restricted Stock Awards (“RSAs”), in which they agreed to receive stock-based compensation and later return the received shares to the company if they failed to meet certain conditions, they should disclose the acquisition of shares (upon their acquisition), and state in footnotes the details of the date of payment, payment conditions (vesting conditions), transfer restriction period and transfer restriction method, among others, when reporting the status of ownership.
 

2.

Reinforcement of Conglomerate Disclosure Requirement for Stock-Based Compensation for Officers

The KFTC strengthened disclosure requirements by amending the disclosure manual for large business groups on April 16, 2024. Specifically, this amendment introduced a new requirement for the business group status disclosure category, making it mandatory to disclose stock award agreements, such as restricted stocks, in the “Securities Transactions with Related Parties” section. Consequently, starting this year, companies affiliated with a business conglomerate that is subject to the disclosure requirement must disclose information, including the (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 agreement (stock award agreements designed to compensate performance achievements regardless of title) executed with a related party (e.g., founder family members, officers) in the preceding business year, once per year.
 
The KFTC revealed that its amendment aims to rectify the limitations of the current disclosure form and its lack of detailed contractual terms in response to concerns over the potential misuse of stock award agreements by founder family members to increase their shareholdings. 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 execution of the agreement. This applies not only to stock grants and RSAs, where shares are awarded upon the execution of the agreement, but also to RSUs, where shares are awarded upon meeting specific conditions (i.e., vesting). Consequently, disclosure will encompass changes resulting from these stock award agreements, including alterations in shareholding by founder family members and potential shifts in the shareholder structure.

The amended disclosure manual was published on the KFTC’s website on April 19, 2024 and will be incorporated into the disclosure form on the FSS’ Data Analysis, Retrieval and Transfer (“DART”) System. First, 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) for public disclosure of the business group’s status. Second, for the 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.
 

3.

Enhanced Requirement for Disclosure of Shareholders’ Right to Make Proposals and Details of Discussions at General Meetings of Shareholders

In consideration of criticisms that investors are unable to make informed decisions about shareholder proposals as a result of unclear disclosure guidelines, hindering the provision of sufficient information in a timely manner, the FSS, on April 12, 2024, revised the disclosure form to ensure that a series of procedures are properly described in the regular reports that are submitted before and after general meetings of shareholders, including (i) the fact that shareholders have exercised their right to make proposals, (ii) the process of including issues proposed by shareholders as agenda items for the general meeting of shareholders, and (iii) details regarding the content of the discussions concerning each agenda item during the meeting, as well as the outcome of such discussions. The revision took effect on April 12, 2024, and must be complied with from the upcoming date of submission of regular reports.

Specifically, (i) the revised form requires the disclosure, prior to the general meeting of shareholders, of the details regarding the exercise of minority shareholders’ rights up to the date of the applicable report (such as the business report issued one week prior to the general meeting of shareholders), including any exercise of the right to make proposals at the meeting. This information must be disclosed in detail in the form of a table identifying the shareholder that exercised the shareholder proposal right, whether the proposal will be included as an item on the meeting agenda, the reason the company determined not to include it if the company is planning to omit it from the agenda and other details regarding matters occurring prior to the meeting (such as the date of receipt of the proposal, any application to the court to compel the company to include specific items on the meeting agenda, etc.). In addition, (ii) the quarterly report issued by the company after the general meeting of shareholders must include the results of the deliberation and resolutions of the shareholders at the general meeting with respect to every item on the agenda, including the items proposed by shareholders. Finally, (iii) whether each item on the agenda was proposed by shareholders and the key details of the discussion regarding such items at the meeting must also be disclosed. The key points of the Q&A session and the pros/cons discussed regarding each item on the agenda should be summarized for disclosure, even if they are not included in the meeting minutes. For example, in a case where shareholders have made a proposal for the appointment of directors, the following could be an “appropriate disclosure” addressing the requirement for specific details: “Discussed Candidate A’s expertise and suitability for the position and Candidate A was questioned regarding whether there was any reason he/she was not qualified to be an outside director, to which the response was that there was not.”