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Key Considerations When Adopting Equity Compensation Schemes in Korea, Recent Amendments to Public Disclosure Regime

2024.03.04

It is becoming increasingly important for Korean companies to establish compensation schemes, such as incentives and welfare benefits, for their personnel based on performance and service duration, in order to manage performance and recruit and retain key talent. Among the various compensation schemes, equity compensation schemes (i.e., those providing remuneration tied to the value of the company’s shares) – which provide motivation for the employees to maintain high performance over the long-term and allow them to receive a share of the gains from the growth of their companies’ value – have attracted attention.
 
The following are the necessary steps when companies adopt equity compensation schemes in Korea:
 

  • Identify the compensation scheme that is appropriate for the company, taking into account the target participants, the type of compensation desired by the participants, the amount of compensation, among other things;

  • Conduct a detailed review of applicable laws and regulations to design a legally compliant compensation scheme that is aligned with the company’s objectives; and

  • Engage in appropriate public disclosure of the details of the company’s equity compensation scheme in a timely manner as required by applicable laws.
     

In this legal update, we discuss certain key considerations to take into account when adopting equity compensation schemes in Korea.
 

1.

Types of Equity Compensation Schemes

In Korea, stock options have traditionally been utilized as a major form of equity compensation. However, due to regulatory restrictions on the granting and exercising of stock options, the following types of equity compensation schemes, which are mainly used by overseas companies, are becoming more widely used in Korea.
 

  • Restricted Stock Awards (“RSA”)/Restricted Stock Unit (“RSU”): Either (i) shares of company stock (through the issuance of new shares or transfer of treasury shares) or (ii) the cash equivalent are granted to officers and employees, upon fulfillment of certain vesting requirements (e.g., completion of a specified retention period).

  • Performance Stock: Shares of company stock (or cash payments) are granted to officers and employees in proportion to, and upon achievement of a predetermined (financial) performance target.

  • Phantom Stock: Hypothetical (or “phantom”) stocks, which are tied to certain predetermined financial metrics, are granted to officers and employees. Following a specified period of time, a payment equal to the difference between the company’s stock price at redemption (which is based on the company’s actual financial performance) and the issuing price of the phantom stock is settled in cash.

  • Employees Stock Purchase Plan (“ESPP”): A stock plan that allows participating officers and employees to purchase their organization’s stock at a discounted price (i.e., lower than the market price).
     

2.

Legal Issues Concerning Equity Compensation Schemes

Companies adopting equity compensation schemes should be aware of the following.
 

  • Although individual laws do not explicitly provide a legal basis for granting equity compensation other than for stock options, it would be important for companies to take into account the regulatory rationales underlying the restrictions on stock options.

  • Since there is no single statute in Korea that comprehensively covers the basis, method, and restrictions in relation to equity compensation grants, companies should ensure that the type and payment method of the equity compensation scheme they plan to implement comply with applicable laws and regulations, such as the Commercial Code, the Financial Investment Services and Capital Markets Act, the Labor Standards Act, the Act on the Promotion of Workers’ Participation and Cooperation, the Personal Information Protection Act, the tax laws, among others.

  • Compliance with the Korean foreign exchange regime is necessary when (i) a Korean company provides equity compensation to officers and employees of its overseas affiliate or (ii) a foreign company provides equity compensation to the officers and employees of its affiliate in Korea.
     

It is worth mentioning that the growing use by Korean companies of equity compensation schemes as a means of compensation has led to the Financial Supervisory Service (the “FSS”) modifying the public disclosure regime.
 

  • As explained in the FSS’s Press Release dated December 20, 2023, companies now need to publicly disclose information related to stock-based compensation, including the basis and procedures of compensation, payment status, and details of grants to major shareholders.

  • For further details regarding the amended filing forms for public disclosure, please refer to our firm’s December 2023 newsletter, titled “Enhanced Disclosure of Stock-based Compensation for Officers and Employees of Listed Companies” (Link).
     

Equity compensation is a type of compensation whose use has increased recently. As a result, the volume of judicial case precedents and administrative interpretive rulings addressing equity compensation schemes is insufficient. It is anticipated that amendments to the applicable laws and regulations will take place to facilitate the proper administration of equity compensation schemes.
 
Given the foregoing, companies should exercise care when adopting and implementing equity compensation schemes, and pay attention to the relevant developments in the legal regime and the experience of other companies in Korea in this connection.

 

[Korean Version]

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