The Financial Services Commission (“FSC”) announced its plan to amend the Corporate Disclosure Form (the “Disclosure Form”) and the Practical Guidelines on Corporate Disclosure (the “Guidelines”) with a view to ensuring that shareholders with a management participation purpose specify detailed plans regarding such management participation purpose in their substantial shareholding report (the so-called 5% report) (link). The proposed amendment aims to provide listed companies and their management with adequate information needed to defend their management rights and thereby enhance fairness and transparency surrounding the competition for management control, while at the same time providing investors of listed companies with sufficient information about any possibility of change in management control so as to strengthen investor protection.
Below is a summary of the key details of the FSC’s plan to improve the substantial shareholding reporting requirements (the “5% reporting rule”):
1. Background
The 5% reporting rule is a disclosure obligation which requires persons holding 5% or more of a listed company’s shares to report the status and purpose of their share ownership and the relevant changes. Pursuant to Article 147 of the Financial Investment Services and Capital Markets Act (the “FSCMA”), (i) where a person becomes a 5% or more holder of a listed company’s shares (initial reporting), (ii) where his/her shareholding ratio subsequently changes by 1% or more (reporting of changes), or (iii) where any change occurs to the purpose of shareholding or other material matters (amended reporting), the shareholder must report matters such as the status and purpose of shareholding to the FSC within five days from the date of the relevant event.
The current disclosure form relating to the 5% reporting rule (Corporate Disclosure Form, Annex No. 44, “Important Points to Note for Disclosure,” 4. Shareholding Purpose) already requires shareholders with a management participation purpose to specify their shareholding purpose in detail. However, an examination of prior disclosures has revealed that a large number of cases failed to include concrete details as required, simply reiterating the examples of management participation purpose stipulated in Article 154(1) of the Enforcement Decree of the FSCMA as the purpose of shareholding.
In recognition of the need to provide sufficient information to (i) companies and their management intending to prepare themselves for the exercise of minority shareholders’ rights in relation to competition for control over management and (ii) investors making their investment decisions based on the information about potential changes in management control, the FSC announced measures to improve the implementation of the 5% reporting rule as described below.
2. Measures for Improvement
The FSC plans to amend the Disclosure Form to encourage market participants to improve their disclosure practice on a voluntary basis and specify the detailed purpose of shareholding and plans relating to their management participation purpose when filing a substantial shareholding report, rather than mandatorily requiring the same by law. In addition, the FSC will provide various examples in the Guidelines for the reference of shareholders with such reporting obligations.
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Shareholders with a management participation purpose that have not yet established detailed plans at the time of filing their substantial shareholding report will be required to file a “corrective disclosure” when such plans are subsequently established.
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Shareholders with a management participation purpose that have established detailed plans will be required to disclose such plans, along with detailed procedures, while refraining from simply reiterating the examples stipulated in the Enforcement Decree of the FSCMA. A relevant example is set forth below:
[Example Statement to be included in the FSC’s Guidelines]
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I, the filer of this report, intend to exercise my influence over the appointment of a new officer, finding that there are limitations to improving the corporate value of XX Corporation under its current management system. I am of the view that candidate OOO is fully qualified to perform the duties as an officer of XX Corporation, given his strong expertise and wide-ranging experience developed while working as ▲▲ in the area of ◇◇. For these reasons, I intend to convene an extraordinary general meeting of shareholders on [Date], 2022 to submit the agenda of appointing OOO as an officer. |
To this end, the FSC plans to implement the amendment of the Disclosure Form by the third quarter of 2022, and amend the Guidelines by December 2022. Further, if deemed necessary based on the progress of the improvement measures, the FSC will also consider amending the Enforcement Decree of the FSCMA in order to mandatorily require stating detailed plans when filing the 5% report.
In light of the FSC’s amendment, it is worth noting that where minority shareholders holding 5% or more of shares with an intention of engaging in management of the company fail to specify detailed plans regarding their management participation purpose when filing their 5% report, this may give rise to a dispute if, for example, the company or its controlling shareholders call for restricting or limiting their voting rights or file a petition for preliminary injunction, citing their failure to adequately fulfill the 5% reporting obligation.
Please also be advised that the FSC’s announcement of the improvement measures may lead to changes in related forms and regulations and have a significant impact on listed companies’ response to shareholder activities and operation of general meetings of shareholders.
[Korean version]
