The Financial Services Commission (“FSC”) recently held a round table presided over by the FSC’s Vice Chairman, So-Young Kim, and attended by the Financial Supervisory Service, the Korea Financial Investment Association, the Korea Exchange (“KRX”), the Korea Listed Companies Association, six domestic and foreign securities companies and four domestic and foreign asset management companies (FSC’s press release dated October 19, 2023). Each of the participants shared the corporate governance reforms they have been pushing forward, as well as the outlook on major future changes to the capital market.
 

• FSC: The FSC is working on measures to (i) strengthen the competiveness of the Korean stock market and (ii) improve regulations governing convertible bonds and treasury stocks in support of fair trade.

• KRX: The KRX acknowledged that it should, together with listed companies, engage in multi-faceted efforts to boost the attractiveness of the Korean stock market. It is assessing ways to improve the KRX listing system by phase by referring to the example of the Japanese stock exchange. The Japanese stock exchange urged (i) listed companies to increase their corporate value (e.g., upscale their efforts to derive higher returns on equity and stock prices and make public disclosures in English), and (ii) companies listed on the prime/standard market with lower returns on equity (e.g., below PBR 1) to publicly announce their plans to achieve higher returns on equity in January 2023.

• Korea Listed Companies Association: It emphasized that listed companies have been striving to implement the new dividend rules announced in January 2023, under which year-end dividends are determined before the shareholders who are entitled to the dividends are identified. According to the Association, as of March 2024, approximately 26% (636 companies) of listed companies should be able to implement the new rules in time for their 2024 dividend distributions. It continues to encourage listed companies to adopt the improved dividend distribution procedures.
   

Listed companies should pay attention to the FSC’s efforts to improve the regulations governing convertible bonds and treasury stocks, as well as the KRX’s mandate directed at listed companies to publicly announce their plans to achieved higher returns on equity and make public disclosures in English. These regulatory developments may lead to potential changes in corporate governance regulations, which are likely to affect listed companies’ responses in relation to the minority shareholders’ exercise of their rights and the administration of general meetings of shareholders. As pointed out by the Korea Listed Companies Association, the FSC rules on dividend record dates (our previous newsletter is available here, Link) will be implemented more broadly and affect the 2024 ordinary general meetings of shareholders onwards. Listed companies should examine the rules as they prepare their agendas for ordinary general meetings of shareholders in 2024, in which the shareholders may need to approve amendments to the articles of incorporation.
 
SEC News
 
On October 10, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted final amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Amended Rules”) (Link 1, Link 2, Link 3). The SEC’s beneficial ownership reporting rules are comparable to the substantial shareholding filing requirements in Korea. An investor who beneficially owns more than 5% of a voting class of equity securities must publicly report such ownership detailing the source of financing, the purpose of holding the equity securities and the shareholding ratio (Schedule 13D), but an exception is made for a qualified institutional investor or a passive investor with no intention to participate in management, who is eligible for simplified reporting (Schedule 13G). The Amended Rules will come into effect 90 days after publication in the Federal Register. Key terms of the Amended Rules are as follows.
 

• Shortening of initial filing deadlines / amendments to Schedules 13D and 13G: (i) The filing deadline for an initial Schedule 13D will be five business days (compared to ten calendar days under the current rules), and (ii) Schedule 13D must be filed within two business days following any material change (compared to a “prompt” filing under the current rules).

• Clarification of Schedule 13D disclosure requirements for derivative securities: Holders of cash-settled derivative securities have generally not been regarded as beneficial owners. The Amended Rules specifically require derivative securities holders to publicly disclose any interest they beneficially hold through derivative securities (including cash-settled derivative securities) with an issuer’s equity securities as the underlying reference securities (including derivative contracts, agreements, understandings, and relationships related to an issuer’s securities).
   

The Amended Rules also apply to Korean listed companies who invested in minority equity securities registered with the SEC.
 
The Amended Rules are expected to significantly influence Korea’s 5% reporting rules. Questions were raised in the past as to the application of the reporting rules to derivative securities, such as total return swaps and other cash-settled derivative securities. The enhanced disclosure requirements for the holding of equity through derivative securities as well as the trend towards reducing the reporting deadline from five to two business days under the Amended Rules may impact the direction of future amendments to our 5% reporting rules.

[Korean Version]