In the wake of recent news that the management of a large listed company sold a massive stake in the company shortly after its IPO, the Financial Services Commission (the "FSC") has proposed amendments to the KOSPI Market Listing Regulations that are designed to strengthen lock-up requirements for officers of newly listed companies, as described in a related press release issued on February 22, 2022.  The changes proposed are intended to protect investors from share price fluctuations caused by massive offloading of shares shortly after a company’s IPO.

In the press release, the FSC identified the following issues as requiring remediation:  

• The basic purpose of lock-up requirements at the time of listing for major shareholders and specially related persons is undermined by the intentional exercise of stock options immediately following the listing, due to the fact that shares acquired post listing are exempt from lock-up requirements.  

• As most newly listed companies uniformly undertake only a six-month lock-up period, there is a risk of massive offloading of shares immediately after six months have elapsed from the date of listing, which will have the effect of increasing price volatility.  

To address these issues, the FSC announced that the following remedial measures will be implemented:

• Lock-up requirements will also be imposed on shares acquired by officers through post-listing exercise of stock options granted before the listing.  As a result, shares acquired by exercising stock options during the lock-up period will be subject to sale restrictions from the time of acquisition through the remaining lock-up period (e.g., if shares are acquired by exercising stock options two months after the listing, such shares will be locked up for the remaining four months of the six-month lock-up period) 

• Under the proposed amendments, newly listed companies will be encouraged to voluntarily set up a staggered system of lock-up periods depending on the classification of officers subject to lock-up requirements.  Staggered lock-up periods will become available as the new system allows adding a period of up to two years on top of the basic six-month period with respect to any given officer that is subject to lock-up requirements.

• In addition to directors, statutory auditors and executive directors defined in the Korean Commercial Code (the “KCC”), persons other than a director who conduct business holding a title which may be recognized as having the authority to conduct such business (e.g., chairman, president, vice-president) under Article 401-2 of the KCC will also be subject to lock-up requirements at the time of listing. 

The FSC announced that the proposed amendments of the KOSPI Market Listing Regulations, the KOSDAQ Market Listing Regulations and the Disclosure Forms incorporating the above measures will be promptly implemented after obtaining approval from the Securities and Futures Commission (the “SFC”) and the FSC within March of this year. 

In light of these changes, companies preparing for an IPO may want to consider taking related measures such as including a lock-up covenant in stock option agreements.  The overall trend of toughening regulations and demands from the market in relation to management’s exercise of stock options may also necessitate a systematic review of various issues concerning stock option agreements.
 

[Korean version]