On January 29, 2020, the Enforcement Decree of the Financial Investment Services and Capital Markets Act ("FSCMA") was amended (the "Amended Enforcement Decree") to take effect from February 1, 2020 (the "Effective Date").  The most significant aspect of the Amended Enforcement Decree is the implementation of changes to the substantial shareholding reporting requirements which applies to any person holding 5% or more of equity securities issued by a listed company in Korea (the "5% Reporting Rules").  

Changes to the 5% Reporting Rules under the Amended Enforcement Decree is driven by the creation of a third category of investment objective named as "General Investment Purpose."  Currently, the FSCMA contemplates two categories of investment objectives for purposes of the 5% Report: (i) shareholders with the intent to influence the management of the company ("Management Participation Purpose") and (ii) shareholders without the intent to influence management of the company ("Portfolio Investment Purpose").  The new category of investment objective, General Investment Purpose, is intended to capture those investors who do not intend to engage in activities constituting Management Participation Purpose but seek to exercise their shareholders' rights more actively than portfolio investors ("General Investment Purpose"). 

We discuss below key aspects of the changes to the 5% Reporting Rules. 

1.    Narrowing of the scope of activities constituting Management Participation Purpose

Under the FSCMA, investors exercising Management Participation Purpose activities are defined as those investors intending to affect the company's business management by exercising their influence against the company or its officers on matters including but not limited to appointment, dismissal or suspension of official duties of a director or statutory auditor, amendments to the articles of incorporation with respect to the organization of the company such as the composition of the board of directors, or changes to the company's paid-in capital. 

Under the Amended Enforcement Decree, certain activities previously stipulated as Management Participation Purpose will no longer be considered as such.  Those activities excluded from the list of Management Participation Purpose activities are: (i) exercise of shareholder rights granted under the Korean Commercial Code in response to illegal conduct by the company and its directors or statutory auditors (e.g., right to file for injunction against tort and right to request for dismissal of officer(s)); (ii) professional investors such as public pension funds seeking to amend the investee company's articles of incorporation in line with the stewardship principles publicly announced by such investors as part of their overall mandate to improve the governance of their portfolio companies; and (iii) seeking changes to the dividend policies of the investee companies.  Going forward, the foregoing activities will be categorized as General Investment Purpose related activities which will be subject to a simpler set of reporting requirements as compared to the reporting requirements under Management Participation Purpose category.  

2.    Application of differentiated reporting requirements by investment objective

Differentiated reporting requirements apply under the 5% Reporting Rules depending on the investment objective of the investor with the strictest requirements applying to the Management Participation Purpose reporting category.  We highlight below some key aspects to consider for filing the 5% Report under the Amended Enforcement Decree. 
 

1)     Management Participation Purpose

The deadline for filing the amended 5% Report which is five business days from the trigger event and the related disclosure requirements for reporting under this category of investment purpose remain unchanged under the Amended Enforcement Decree.  However, due to the narrowing of the activities constituting Management Participation Purpose as discussed above, some investors will now need to file an amendment to their 5% Report and report under the new category of investment objective, General Investment Purpose, to the extent their investment objective falls under the new category.
  

2)    Portfolio Investment Purpose

The 5% Report for Portfolio Investment Purpose is intended to capture those investors intending to exercise only those rights guaranteed under the law to all shareholders such as voting rights, preemptive rights and dividend rights.  The reporting deadline for the amendment report and related disclosure requirements remain unchanged.  Amendment reports are required to be filed either by the tenth day of the month following an amendment event other than a change in investment purpose or in the case of a change in investment purpose, an amendment report must be made by the fifth business day following the change. 

Investors who have filed the 5% Report under the Portfolio Investment Purpose category should review and assess their intended investment objectives and determine if their investment objectives now fall under the new category of investment objective, General Investment Purpose which would require making an amendment to the existing 5% Report.
 

3)    General Investment Purpose

The 5% Reporting Rules under the General Investment Purpose category requires additional disclosures compared to reporting under the Portfolio Investment Purpose category.  For instance (i) source of funds for the subject investment including the identity of the lender in case debt financing was used and (ii) material terms of the contracts related to the equity securities are required to be disclosed.

The reporting deadline for the initial report to be filed under the General Investment Purpose category is five business days from the trigger event.  Amendment reports are required to be filed by the tenth business day following an amendment event other than a change in investment purpose and in the case of a change in investment purpose, an amendment report must be made by the fifth business day following the change. 

Reporting deadlines applicable for the first report since the adoption of the Amended Enforcement Decree should be noted.  In cases where the trigger event for the 5% Report (either for the initial report or the amendment report) arose before the Effective Date, but the reporting deadline has not lapsed as of the Effective Date, the relevant 5% Report may be made in accordance with the 5% Reporting Rules which were in place prior to the Amended Enforcement Decree.  However, investors whose investment objectives fall under the newly adopted General Investment Purpose category of investment objective as of the Effective Date must file their reports in accordance with the requirements under the Amended Enforcement Decree within five business days (i.e., February 7, 2020) from the Effective Date.  

Investors subject to the 5% Reporting Rules are advised to exercise particular care in reviewing their circumstances so that the 5% Reporting Rules are fully complied with in accordance with the new standards set forth under the Amended Enforcement Decree.