The remuneration of officers and employees of listed companies is composed of multiple elements: (i) base salary; (ii) short-term performance pay; (iii) long-term performance pay; (iv) stock-based compensation; and (v) severance pay, etc. Currently, the issue of determining remuneration for officers and employees by resolution of the board of directors and general shareholders’ meeting, and the disclosure of relevant details, as well as the question over these directors’ observance of the duty of care and fiduciary duty in this decision-making process for the appropriateness of remuneration, have emerged as important issues in corporate governance. In light of the mentioned circumstances, minority shareholders, such as activist funds and minority shareholder associations, are increasingly raising concerns about these matters.
 
In this regard, stock-based compensation has become the most prominent issue, with the increased use of compensation methods other than traditional stock options recently, such as the disposal of treasury shares, etc., where officers and employees directly receive the company’s shares or money equivalent thereto based on certain conditions such as their terms of service or performance achievements. Such form of compensation is provided under various names, such as restricted stock, performance stock, stock grant or phantom stock.
 
Concerns have been raised that the abovementioned forms of compensation, such as restricted stock, may be abused as means for major shareholders to expand their stakes, because, unlike stock options, existing regulation does not specifically govern the granting and payment of these types of compensation. There have been concerns raised regarding the disclosure aspect as well, as (i) notes to the financial statements can only confirm some of the information and details about the compensation granted to major shareholders, such as their basis, procedure, and payment status, and (ii) there are limitations in comparing the details among companies.
 
In response, in order to ensure the disclosure of sufficient information on stock-based compensation, the Financial Supervisory Service (the “FSS”) announced in its press release on December 19, 2023, that it amended the forms of (i) regular report including business report, (ii) report on major facts, (iii) report on the status of stocks, etc., held in bulk, and (iv) report on the status of specific securities, etc., owned by officers, which take effect in the end of 2023, and that in the first half of 2024, it will inspect the status of disclosure of stock-based compensation by companies, and take necessary measures such as instructing companies to voluntarily correct any deficiencies in the disclosure.
 

• Status of operation of each stock-based compensation plan: In the “Remuneration, etc., for Officers” section, a company should specify the name, grounds for and procedures of each stock-based compensation plan operated by it, the number of persons and number of shares granted (meaning that a stock-based compensation agreement has been executed) and paid (meaning that the shares have been actually delivered), payment conditions (vesting conditions), the number of shares paid or unpaid, and whether there is a prescribed period of restriction on transfer, etc. (companies are required to disclose the overall status of the stock-based compensation plan only, not the details of the grant and payment per individual).

• Status of grant and payment to each major shareholder: In case a company engages in a stock-based compensation transaction (other than stock options) with a major shareholder, the company should specify in the “Details of Transactions with Major Shareholders, etc.” section, the key details of such transaction, including the grounds for and procedures of granting the compensation to each major shareholder, the date of the grant and payment, the number of shares granted and paid, the payment conditions (vesting conditions), the status of payment, and whether there is a restriction on transfer.    

• The above information must be provided in the business reports and semi-annual reports. In the case of quarterly reports, the status of operation of each stock-based compensation plan may be omitted, and the status of grant and payment to each major shareholder should be provided only if there is any change.
   

• If a company decides to acquire or dispose of treasury shares in order to pay stock-based compensation, it should state in the “Purpose of Acquisition (Disposal) of Treasury Shares” section of the “Report on Major Facts” regarding the acquisition or disposal of treasury shares, that the purpose is to pay shares based on stock-based compensation, and specify the key details of the stock-based compensation, including the name of the compensation plan, the number of persons and shares, etc., to be paid, and the payment conditions (vesting conditions) in the “Other Matters to be Considered for Investment Decision” section.
   

• The amendment clarifies that, once an officer or employee, etc., of a listed company satisfies the payment conditions (vesting conditions) for stock-based compensation and his/her right to receive voting shares is established, the obligation to file a report on stocks held in bulk (5% report) is triggered even before he/she actually receives the shares, as the holding of such right constitutes “possession similar to ownership” (amendment to the guidelines on preparation of disclosure forms).

• In addition, when the relevant officer or employee actually receives the shares after such right has been established, the form of shareholding changes from “possession” to “ownership,” and thus, if the change of the shareholding ratio results in 1% or more, the obligation to file an amendment report is triggered.
   

• The amendment clarifies that, in the event an officer or a major shareholder of a listed company receives stock-based compensation in the form of an agreement to receive the shares first and then return the shares to the company if he/she fails to meet certain conditions (referred to as a “restricted stock award” in the FSS materials, the method of definitively paying shares after the satisfaction of certain conditions is referred to as a “restricted stock unit”), he/she should disclose such fact when acquiring the shares, and state in footnotes the details thereof, including the date of payment, payment conditions (vesting conditions), the period of restriction on transfer, and the method of restriction on transfer, when reporting the status of ownership (amendment to the guidelines on preparation of disclosure forms).
   

Even under the existing legal principles, disclosures such as business reports, reports on major facts, 5% reports, and 10% reports were deemed as “required” when companies pay stock-based compensation. However, supervisory authorities have clearly stated the need for more detailed disclosures of stock-based compensation and announced the plan to strengthen supervision by providing detailed guidelines. Therefore, we advise listed companies to take caution in introducing and operating stock-based compensation plans for officers and employees in the future.

[Korean Version]