National Assembly Approves the Proposed Amendment to the Enforcement Decree of the FSCMA on Mandatory Prior Disclosure of Insider Transactions

As noted in our previous newsletter released earlier this year (Link), the National Assembly promulgated an amendment to the Financial Investment Services and Capital Markets Act (the “Amended FSCMA”) last year to introduce advance disclosure requirements for insider transactions involving listed companies. The Amended FSCMA was set to take effect on July 24, 2024, key provisions of which are as follows:

If an “insider” of a listed company intends to buy or sell shares (including equity securities, convertible bonds, bonds with warrants, and related depository receipts) issued by the listed company (“Specified Securities”), in an amount that meets the threshold specified by the Enforcement Decree, he/she must disclose the purpose, price, volume, and period of the transfer prior to the scheduled trading date (i.e., a period of at least 30 days, but not longer than 90 days prior to the trading date, as prescribed by the Enforcement Decree). For purposes of the Amended FSCMA, an “insider” of a listed company refers to an executive (including a director, auditor, and de facto executive (e.g., a person who orders business execution)) or a major shareholder (i.e., a person holding at least 10% of the shares of such listed company or having the power to exert de facto influence, excluding a set of persons exempted under the Enforcement Decree of the Amended FSCMA).
Matters such as the specific transaction volume subject to prior disclosure obligations, persons exempt from disclosure obligations, disclosure deadlines, and reasons for making changes to disclosures are delegated to the Enforcement Decree.
Failure to disclose transaction plans, provision of false disclosures, failure to implement transaction plans, and any other violations of disclosure obligations may result in an administrative fine of 0.02% of the market capitalization of the listed company, not to exceed KRW 2 billion (Article 429 (5) of the Amended FSCMA).

In connection with the Amended FSCMA, the Financial Services Commission underwent the usual procedures for legislative notice and pre-announcement (Link) with respect to (i) the amended Enforcement Decree of the FSCMA (the “Amended FSCMA Enforcement Decree”) stipulating matters delegated by the FSCMA, (ii) the amended Regulations on Disgorgement of Short-Swing Profits and Unfair Trading Investigation and Report, Etc. (the “Amended Short-Swing Profits Regulations”), and (iii) the amended Capital Markets Investigation Operations Manual (the “Amended Investigation Manual”). All of these amendments were finally approved by the government at a cabinet meeting held on July 9, 2024 (Link). The key provisions of these amendments are as follows:

Insiders Excluded From the Scope of Parties Subject to Prior Disclosure Obligations (Article 173-3 (1) of the Amended FSCMA, and Article 200-3 (1) of the Amended FSCMA Enforcement Decree)

Under the Amended FSCMA Enforcement Decree, the scope of parties subject to prior disclosure obligations excludes financial investors that are expected to have a relatively higher level of internal control standards and be less likely to misuse material non-public information (e.g., collective investment vehicles (including special purpose companies) such as pension funds and private equity funds, banks, insurance companies, specialized credit finance companies, financial investment businesses, and venture capital firms, and the Korea SMEs and Startups Agency).
In addition, foreign investors with a status equivalent to domestic financial investors are also excluded from the scope of parties subject to prior disclosure obligations, in order to ensure equal treatment of domestic and foreign investors.

Transaction Volume and Types Exempt From Prior Disclosure Obligations for Transaction Plans (Article 173-3 (1) of the Amended FSCMA, Article 200-3 (2) of the Amended FSCMA Enforcement Decree, and Article 9-3 of the Amended Short-Swing Profits Regulations)

Exempt from the reporting obligation are (i) any transaction where the trading volume of Specified Securities that are the subject of such transaction constitutes less than 1% of the total number of issued and outstanding shares of the relevant listed company, and (ii) any transaction where the value of Specified Securities that are the subject of such transaction is less than KRW 5 billion, in each case aggregated over the past six months (prior to the commencement date of the relevant transaction) and during the trading period.
Also exempt from the prior disclosure requirement are transactions executed due to unavoidable reasons, such as where there is no risk of misuse of material non-public information as specified below^[1] and where transactions are conducted due to external factors.^[2]

Prior Disclosure Procedure and Method for Insider Transactions (Article 173-3 (1) through (3) of the Amended FSCMA, Article 200-3 (3), (4) and (6) of the Amended FSCMA Enforcement Decree, and Article 9-4 of the Amended Short-Swing Profits Regulations)

The parties subject to prior disclosure obligations are required to specify in their transaction plan reports the (anticipated) trading amount, price, volume, and period of Specified Securities to be traded.
The transaction that is the subject of a transaction plan report must be completed within 30 days from the scheduled commencement date thereof. The reporting of any new transaction plan is prohibited from the date the existing transaction plan is reported until the date the implementation of the relevant transaction plan is completed.
The amount in the transaction that is the subject of a transaction plan report may deviate from the amount set out in such transaction plan by up to 30%, providing flexibility to the parties subject to prior disclosure obligations to respond to changing market conditions.
Reporting of a transaction plan must be made 30 days prior to the commencement of the relevant transaction. Accordingly, the reporting obligation is applicable to transactions for which payment will be made on or after August 23, 2024 (and which are executed by floor trading on August 21, 2024), which is 30 days after the enforcement date of the Amended FSCMA (July 24, 2024).

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 in 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,^[3] (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 submitting the transaction plan.

Method of Calculating Administrative Fines for Violations of Prior Disclosure Obligations for Insider Transactions (Article 429 (5) and (6) of the Amended FSCMA, Article 379 (6) and (7) of the Amended FSCMA Enforcement Decree, and Attached Table 2-3 of the Amended Investigation Manual)

Failure to disclose transaction plans, provision of false disclosures, failure to implement transaction plans, and any other violations of disclosure obligations may lead to an administrative fine of 0.02% of the market capitalization of the listed company, not to exceed KRW 2 billion. Accordingly, the Amended FSCMA Enforcement Decree has set out detailed provisions whereby administrative fines can be imposed differently depending on the market capitalization, trading amount, severity of violation, etc.

The purpose of enforcing these prior disclosure requirements is to enhance the transparency and predictability of large-scale insider transactions in order to prevent unfair trading practices and safeguard general investors. For insiders, including major shareholders, the requirement to disclose substantial share sales in advance will mitigate unnecessary potential misunderstandings, which may occur due to the use of non-public information in disposals of shares.

For major shareholders, however, there may be a number of relevant factors to take into account when reviewing transaction structures for large-scale share trading. This is because major shareholders are required to disclose information about their large-scale transactions in advance, thereby inevitably exposing themselves 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 requirements.

[1] Where the sale or purchase of shares is inevitable due to a statutory requirement, or is intended for stabilization or market creation (exceptions to disgorgement of short-swing profits (under Article 198, Subparagraphs 1 through 12 of the Amended FSCMA Enforcement Decree) are applied mutatis mutandis).
[2] Succession/inheritance; share dividends; mergers and acquisitions involving the transfer or acquisition of shares; acquisitions or disposals of shares due to split-up or merger; or covering (or reverse trading) due to a decrease in the collateral value of shares.
[3] Where the relevant stock price exceeds 30% of the closing price of the day preceding the reporting date of the transaction plan.

[Korean Version]

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