The Financial Services Commission ("FSC") announced draft amendments to the Enforcement Decree to the Financial Investment Services and Capital Markets Act ("FSCMA") (the "Proposed Enforcement Decree") on September 6, 2019.  The Proposed Enforcement Decree includes amendments to the reporting requirements of persons holding 5% or more of the total issued equity securities of a listed company (the "5% Reporting Requirements") to facilitate shareholder engagement activities by institutional investors. 

1.    Background to Amendments

Shareholder engagement activities by institutional investors have increased with the adoption of the Principles on Stewardship Responsibilities of Institutional Investors (the "Stewardship Code").  To further this trend, institutional investors have called on the FSC to amend and supplement the 5% Reporting Requirements, which require shareholders to file a report with the FSC and the Korea Exchange ("KRX") of their shareholding status within five business days of obtaining 5% or more of the total issued equity securities of a listed company or making any subsequent change in their shareholding.  For the purposes of the 5% Reporting Requirements, shareholding is aggregated with the holdings of certain related persons and persons acting in concert with the shareholder. 

In addition, if a shareholder obtained the equity securities with the intent to "influence management," it must disclose such in a specified report (the "Management Influence Report").  Institutional investors have raised concerns that the definition of "influence management" is too broad and unclear under the current 5% Reporting Requirements.

2.    Proposed Amendments

A.    Clarifying scope of "influence management"

The Proposed Enforcement Decree clarifies and narrows down the scope of the definition of "influence management" (as defined in Article 154(1) of the Enforcement Decree of the FSCMA).  The definition in Article 154(1) includes, among other things, the following as matters that would constitute influencing management: the appointment or dismissal of an executive officer, amendments to constitutional documents with respect to the organization of the company, mergers and disposals of significant assets and the dissolution of the company.  Under the Proposed Enforcement Decree, the definition will exclude:

• Amendments to the articles of incorporation proposed by a public pension fund where such pension fund has proposed such amendments in accordance with previously published guidelines relating to improving corporate governance for all of its portfolio companies (and not certain limited specified portfolio companies); provided, however that this exclusion would not apply to any proposed amendments that would directly influence the appointment or dismissal of a specific director or auditor;
• Any shareholder activities in relation to dividends, which are a primary right of shareholders; and
• Any simple statements of opinion made to the listed company or any third parties.

B.    Threefold-reporting classification based on purpose of holding

If an investor does not intend to "influence management" and therefore does not need to file a Management Influence Report pursuant to the 5% Reporting Requirements, it is required to instead file a simplified report.  Instead of two types of reporting forms depending on whether there is purported intent to influence management, the Proposed Enforcement Decree creates three types of reports:  

• Management Influence Report: when the shareholder intends to "influence management"; 
• General Investment Report: when the shareholder intends to actively engage in shareholder related activities, for example, making proposals in respect of director compensation or dividends to be voted on at shareholders' meetings, but without the broader purpose to "influence management"; and  
• Simple Investment Report: when the shareholder intends to exercise only basic shareholder rights, such as voting and receiving dividends. 

The Simple Investment Report will include minimum disclosure obligations, while the General Investment and Management Influence Reports include more stringent disclosure obligations. 

Under the Proposed Enforcement Decree, the deadline for filing an initial report continues to be five business days from the trade date on which the 5% Report Requirement filing obligation is triggered.  However, the deadline for any subsequent change report would differ based on the type of report: (i) in the case of a Management Influence Report, within five business days; (ii) in the case of a General Investment Report, within ten days; and (iii) in the case of a Simple Investment Report, by the tenth day of the month immediately following the month in which there is any change of 1% or more in respect of the holding in question.  In addition, in the event of any change in the purpose of the holding, a report of such change must be filed within five business days of the change. 

It is expected that the Proposed Enforcement Decree will be finalized following the expiry of the comment period, October 16, 2019.  The FSC anticipates to pass the Proposed Enforcement Decree during the first quarter of 2020. 

Investors in equity securities subject to 5% Reporting Requirements should carefully monitor the status of the Proposed Enforcement Decree to ensure that it duly files an appropriate report in a timely manner as required by the proposed amendments.