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Recent Changes to the Korean Short Sale Rules Following the announcement of the “Proposed Improvement Measures for the Korean Short Sale Regime” (the “Proposed Measure on Short Sale Regime”) in June 2024 by the joint consultation group consisting of the Financial Services Commission (the “FSC”), the Financial Supervisory Service (the “FSS”), the Korea Exchange (the “KRX”) as well as the ruling party (Link), various stakeholders have prepared and developed concrete implementation measures. On August 12, 2024, the Korea Securities Depository (the “KSD”) announced proposed amendments to the “Regulation on Intermediation of Securities Lending and Borrowing Transactions” and subordinate regulation (the “Proposed KSD Regulation Amendments”). On August 21, the FSS released the guidelines for short sale internal controls and inventory management system in the form of an administrative guidance (the “Short Sale Internal Control and Systems Guidelines”) (Link). Finally, on August 28, the proposed amendments to the Financial Investment Services and Capital Markets Act (the “FSCMA Amendments”) containing, among other things, strengthened penalty for failure to prevent short sale breaches and market abuse conduct passed the National Policy Committee of the Korean National Assembly and are expected to become effective at the end of September or early October upon resolution at the plenary session of the National Assembly. Status of Proposed Improvement Measures 1. The FSCMA Amendments The key obligations and restrictions introduced under the proposed amendment to the FSCMA are as follows: Measures Details Obligations on investors and local brokers to prevent naked short sale ① Corporate investors* intending to short sell listed Korean securities are required to adopt and implement internal control standards and inventory management system. *Corporate investors that are subject to these requirements are as follows: Short sale internal control standards requirement: All corporate investors who intend to short sell listed Korean securities. Inventory management system requirement: Corporate investors who (i) for one day or more since January 1, 2023, have held a net short position balance in respect of a relevant listed Korean security exceeding 0.01 percent of all issued shares of relevant security or amounting to KRW 1 billion or more in notional amount, or (ii) plan to hold such net short position in the future. ② Brokers must check whether a corporate investor has adopted and implemented requisite short sale internal control standards and systems before accepting short sale orders from the corporate investor. Limitations on maximum term of securities borrowing which is executed for the purpose of short selling ① Securities lending and borrowing transactions executed for the purpose of placing covered short sell order must stipulate the term* of the borrowed securities. *Under the Proposed KSD Regulation Amendments, the term of the securities lending and borrowing transactions executed for short sale cannot exceed 90 days from the execution date, and while the term could be subsequently rolled over by the parties’ agreement, the total term cannot exceed 12 months. ② Agents, brokers and arrangers of the securities lending and borrowing transactions are required to ensure that the borrowers comply with the limits on terms by managing the borrowing transactions based on the purpose of transactions as notified by the borrower. Heavier penalties for unfair trading activities ① Similar to the case of other types of unfair trading activities, a person that has engaged in naked short sale would be subject to aggravated criminal penalty of imprisonment,* depending on the amount of profit generated or loss avoided from naked short sale. *The following aggravated penalties would apply: Amount of profit generated (or loss avoided) Aggravated penalty KRW 5 billion or more Minimum imprisonment of five years and up to life imprisonment KRW 500 million or more and less than 5 billion Minimum imprisonment of three years Less than KRW 500 million Minimum imprisonment of one year ② A person who commits insider trading, market manipulation, fraudulent trading or naked short sale may be subject to criminal fine of up to four to six times (increased from three to five times) the profit generated or loss avoided from relevant illegal conduct. ③ The FSC may prohibit a person who has engaged in certain prescribed unfair trading activities* from trading financial investment products for that person’s account or, for individuals, being appointed as an executive of a listed Korean company, in each case for up to five years. *The prescribed unfair trading activities are: (i) leakage or use of material information related to listed derivatives; (ii) insider trading; (iii) market manipulation; (iv) fraudulent unfair trading; (v) market disruption; (vi) naked short sale, and (vii) acquisition of securities in breach of prohibition imposed on short sellers. ④ If there is convincing evidence indicating that a person has committed one of the prescribed unfair trading activities and if there is convincing justification to determine that suspension of financial transaction is necessary, the FSC may instruct financial companies to suspend relevant trading account(s). Restrictions on acquisition of convertible bonds and bonds with warrant by short sellers ① In addition to the existing prohibition on participation of the rights offering by short sellers, the amendment will introduce prohibition on acquisition of convertible bonds and bonds with warrant by short sellers. 2. Short Sale Internal Control and Systems Guidelines With release of the Short Sale Internal Control and Systems Guidelines from August 21, 2024, the FSS also circulated a checklist intended for the Korean broker’s review of appropriateness of the investors’ short sale compliance system. Accordingly, all corporate investors who intend to engage in covered short sale involving listed Korean securities are required to implement the guideline for short sale internal controls and internal inventory management system as necessary and also obtain confirmation of regulatory compliance from their local securities brokers. Please refer to our newsletter from August 2024 (Link) for additional information. 3. Proposed Amendments to the KSD Regulations The Proposed KSD Regulation Amendments set forth limitations on the terms of securities lending and borrowing transactions related to covered short sell orders and clarifications regarding standards on recall of loaned securities, as summarized below. Measures Details Limitations on maximum term of the securities lending and borrowing transactions executed for the purpose of short sale The term of the securities lending and borrowing transactions executed by a borrower for the purpose of placing covered short sell order cannot exceed 90 days from the execution date of relevant transactions, provided that the final redemption date may be extended based on the parties’ agreement but even in such case the total term of relevant transactions must be less than 12 months. Clarification on recall processes of the loaned securities Under the existing KSD regulations, if a lender requests early redemption of the loaned securities before 12 p.m. on a given day, the borrower is required to return the securities within three business days from the date of the request (counting the date of request as the first business day, i.e., T+2). If a lender’s early redemption request was made on or after 12 p.m. on a given day, the borrower is required to return the securities within four business days from the date of the request (i.e., T+3). In the cases where a lender places a sell order for the loaned securities and makes an early redemption request on the same day but on or after 12 p.m., as the borrower is required to return the loaned securities by T+3 under the existing KSD regulations, there was a possibility that the loaned securities would not be returned in time for settlement, thereby creating a risk of settlement failure. To address such risk, the Proposed KSD Regulation Amendments allow the parties to agree otherwise, notwithstanding the early redemption timeline set forth therein, so that the borrower could be obligated to return the loaned securities by T+2 or earlier even when the lender makes an early redemption request on or after 12 p.m. on T. Inclusion of trading suspension as termination event of the securities borrowing transactions Under the Proposed KSD Regulation Amendments, in case the maturity of a securities lending and borrowing falls during the period of trading suspension, the maturity would be postponed until the trading suspension is lifted. Establishment of process for handling stock dividends The Proposed KSD Regulation Amendments provide that the lender and the borrower of an existing securities lending and borrowing transaction would be deemed to have entered into a securities lending and borrowing transaction with the same terms and conditions in respect of the stock dividends which are paid during the term of the existing securities borrowing transactions. In light of the new rules and processes which have been or will soon be implemented as explained above, the investors who intend to engage in short sale trades involving Korean listed securities (that is, after the lifting of the current short sale ban) and local securities brokers who facilitate such trades are advised to thoroughly review new rules and processes and make necessary preparations in advance. [Korean Version]
2024.09.05

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Amendments to the Korean Commercial Code Abolish Branch Registers and Specify Registration Requirements for Overseas Companies On August 12, 2024, the Korean Government proposed a set of amendments to the Korean Commercial Code (“KCC”) (Bill No. 2202753) aiming at the corporate registration system (the “Amendments”). The Amendments passed the plenary session at the National Assembly on August 28, 2024, and are scheduled to take effect on January 31, 2025, after undergoing the promulgation process. The Amendments introduce major changes to the existing corporate registration system, which involve abolishing the requirement to register the branch offices, simplifying the procedure for registering the relocation of a company’s principal office, and realigning the registration requirements for overseas companies. We summarize the key terms of the Amendments as follows. 1. Abolition of the Branch Register Requirement Under the current KCC, a company is required to register its branch office with the court register located at the branch office, separately from its principal office. The branch register was required to include details that were mandatorily required to be stated in the principal office register, unless an exception applied in the KCC (KCC, Articles 35 and 181). These requirements and practices raised the following issues: (1) There could be inconsistencies between the principal office register and the branch office register, which negatively affect the reliability of official corporate registers. (2) A separate branch register offers no practical benefit as most of the registered items in a branch office register can be found in the principal office register already. In addition, corporate registers are now available through a centralized and computerized system and anyone can retrieve or access a corporate register online through such system. Hence, the need for a separate branch register, with the court register at the branch office address no longer exists. The Amendments seek to abolish the branch register requirements by deleting Article 35 of the KCC, and amending other related articles. As a result, a company will no longer need to register the establishment of its branch office, or register various key decisions in connection with its branch office, such as the appointment of managers, dissolution, liquidation, merger or reorganization. 2. Simplification of the Procedure for Registering the Relocation of Principal Office Under Article 182 (1) of the current KCC, within two weeks of the company’s relocation of its principal office, the company must register the address of the new location and the relocation date at the register at the former location, as well as register the principal office at the register at the new location, as required under Article 180 of the KCC. Given that the identity of the company remains the same despite the relocation of its principal office, the aforesaid requirement has been criticized for potentially undermining the continuity of registration for the same company, when its existing registration records are required to be closed to open new registration records. To address this issue, the Amendments provide that when a company relocates its principal office, the new location and the relocation date shall be registered either at the previous location or the new location of the principal office within two weeks, and if a company relocates its branch office, the new location, and the relocation date shall be registered at the location of the principal office within two weeks. 3. Realignment of the Registration Requirements for Overseas Companies The current KCC has no provisions specifying the types of information required for registration for an overseas company, except to state that an overseas company establishing a business office to engage in business in the Republic of Korea shall make the same registration as that of a branch office of a Korea-incorporated company or a company of the most similar kind (Article 614 (2) and (3) of the KCC). In order to eliminate regulatory ambiguity and realign the regulatory framework following the abolition of the branch register requirement, the Amendments stipulate the matters requiring registration for an overseas company, along with the procedures for registering the relocation and changes of an overseas company’s business office. Accordingly, the business office of an overseas company is required to register the following matters: (i) the governing law of the establishment of the company; (ii) the name, address, resident registration number, etc., of the company’s representative in Korea; and (iii) general matters of the company (e.g., purpose of incorporation, trade name, personal information of the representative, regulations on co-representatives, location of the principal office and branch office, duration of the company’s existence or reasons for dissolution and method of public notice, etc.). Concurrently with the amendments to the KCC, the Commercial Registration Act has also been amended to allow companies to file applications for registration through a mobile app (Article 24 (1) 2 of the amended Commercial Registration Act). Accordingly, companies will be able to apply for registration by using a mobile device, in lieu of visiting the competent registry. The Amendments are anticipated to address the inconsistency between the registration of a company’s principal office and branch office, and the complicated branch registration procedure for a company with multiple branch offices, in addition to simplifying the procedure for registering the relocation of a company’s principal office. Further, as the Amendments clearly set out the registration requirements for overseas companies, the matters requiring registration will be applicable to the registration of changes concerning an existing overseas company’s branch office in Korea, as well as to the registration of establishment of a new overseas company’s branch office in Korea. For overseas companies with branch offices or subsidiaries in Korea, it would be advisable to pay attention to the regulatory changes made to the registration requirements following the Amended KCC when making management decisions and registrations. [Korean Version]
2024.09.10

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KFTC Issues Advance Notice of Proposed Amendments to Guidelines on Social Media Influencer Marketing On August 21, 2024, the Korea Fair Trade Commission (“KFTC”) issued an advance notice of the proposed amendments to its Guidelines on Review of Labelling and Advertisements Regarding Recommendations and Endorsements (“Guidelines”) regarding social media influencer marketing that changes, among others, the location of economic interest disclosures for sponsored content on social media. The proposed amendments, for which the public comment period ends on September 9, aim to address problems that have surfaced during its application and to address major violations identified during the KFTC’s annual monitoring of advertisements on social media. Key details of the proposed amendments are as follows: 1. Require Economic Interest Disclosures to Be Made in the Title or at the Beginning of the Post on Text-Based Social Media Under the current Guidelines, economic interest disclosures for sponsored content on text-based social media are required to be made at the beginning or at the end of the post. However, as noted in the results of the KFTC’s monitoring in 2022 and 2023, there have been repeated consumer complaints on the difficulty of recognizing such disclosures on smaller (e.g., mobile phone) screens, as the disclosures were often hidden behind a “see more” link. To address this issue, the proposed amendments instead require the economic interest disclosures to be made in the title or at the beginning of the post, which will allow consumers to more easily identify that the post is a sponsored content. The proposed amendments also (i) require disclosures in the post title to be appropriately drafted so that the entire disclosure statement is visible without requiring additional clicks or scrolling, and (ii) require disclosures at the beginning of a post to be made easily recognizable by distinguishing the disclosure statement from the content (e.g., by using a bigger font size or a different color). 2. Make Clear That the Use of Conditional or Unclear Expressions in Economic Interest Disclosures Is Not Acceptable The proposed amendments add to the list of examples of unclear disclosure statements those that use conditional or unclear expressions (e.g., “may receive a certain commission”) because such expressions could suggest that the content is not a sponsored content. As the Guidelines require clear disclosure of economic interests in a way that is easily recognizable to consumers, companies that engage in influencer marketing should make sure to improve any expressions in the economic interest disclosure statements that can be interpreted as being conditional or unclear. 3. Make Clear That the Economic Interest Disclosures Are Required Even If Monetary Compensation Is Paid Conditionally in the Future Because the current Guidelines can be interpreted as economic interest disclosures being required only if monetary compensation is received in advance of the posting, the proposed amendments specify that economic interest disclosures are required even if monetary compensation is paid conditionally in the future. The proposed amendments do this by adding to the list of examples of disclosure statements that could influence the credibility of the sponsored content two recently popular modes of influencer marketing, which involve (i) payment of monetary compensation based on sales made using a discount code or through a purchase link in the sponsored post, and (ii) payment of the price of a product that was first purchased by an individual after the individual posts a product recommendation on his/her own social media account or in the form of a customer review on an online shopping platform. Therefore, companies that engage in such marketing practices should make sure that the economic interest disclosures are required even for social media content that involves conditional future payment of monetary compensation. Going forward, we expect the KFTC to continue increasing its scrutiny of influencer marketing and enforcement against influencer marketing-related violations. This is based on the KFTC’s Enforcement Plan for 2024, which expresses its commitment to regulate deceptive or surreptitious advertisements on social media, and sanctions imposed in July against companies for recruiting social media influencers to post sponsored content that failed to clearly disclose the economic interests or that falsely suggested that the influencers had actually used the products. The sanctions included corrective orders, orders to make a public announcement of the violation and administrative fines. Companies that engage in influencer marketing are advised at this time to review the details of the proposed amendments, review their existing influencer marketing practices and make any corrections as necessary, and accordingly update internal influencer marketing rules that are used for training employees. [Korean Version]
2024.08.28

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Amendment to the Anti-Graft Act to Increase Limit on Meal Expenses On August 19, 2024, an amendment to the Enforcement Decree of the Improper Solicitation and Graft Act (the “Anti-Graft Act”) was approved during a Cabinet meeting. The approved amendment (the “Amendment”) increases the upper limit on meal expenses that may be received or provided to “public officials” or “persons engaged in public services” (collectively, the “Public Officials”) from KRW 30,000 (approximately USD 22.50) to KRW 50,000 (approximately USD 37.50). This marks the first increase in eight years since the Anti-Graft Act was enacted in 2016. Prior to the Amendment, the upper limit on meals that may be received or provided to Public Officials for the purpose of facilitation of their duties, social norms, ceremonial occasions, or congratulatory/condolence events, was KRW 30,000 per person. Critics argued that this limit was unrealistic and impractical, noting that the amount was adopted from what was provided in the “Government Officials’ Code of Conduct,” which was adopted in 2003, and had never been adjusted for inflation or changes in social factors. In response to these concerns, several amendments to the Anti-Graft Act have been proposed in the past by both major political parties. The Anti-Corruption and Civil Rights Commission (“ACRC”) issued a preliminary announcement of the Amendment on July 29, 2024. The Amendment was subsequently approved during a Cabinet meeting on August 19 and will be promulgated and enforced by around the end of August, eight days after receiving the President’s approval. The table below shows the applicable ceilings for various types of gifts under the exception provided for benefits provided for the purpose of facilitation of duties, social norms, etc. under Article 8, Section 3, Paragraph 2 of the Anti-Graft Act: Type of Gift Upper Limit Meals (with Public Officials, including drinks) Increased from KRW 30,000 to KRW 50,000 per person Congratulatory or condolence payments (only for weddings and funerals) KRW 50,000 for congratulatory or condolence payments KRW 100,000 for floral arrangements in lieu of cash payments If providing both congratulatory/condolence payments and floral arrangements at the same time, a combined total of up to KRW 100,000 is permitted (as long as the individual amounts are within the limits for each type of gift) Gifts (excluding cash and cash gift certificates) KRW 50,000 KRW 150,000 for gifts of agricultural, livestock and fishery products as well as processed agricultural, livestock and fishery products (KRW 300,000 for the period ranging from 24 days before the Lunar New Year and/or Chuseok holidays to five days after said holidays) It is important to note that, even after the Amendment enters into effect, a meal costing up to KRW 50,000 is not unconditionally permitted under the Anti-Graft Act. It is only permissible “for the facilitation of the Public Officials’ duties.” Even if a meal costs less than KRW 50,000, there is still a risk of sanctions if there is suspicion of compromised fairness in the performance of a public official’s duties. For example, if a company received a requested license or a permit and then provides a meal costing less than KRW 50,000 to a public official who is handling the relevant case, or if there are excessive and repeated entertainments provided to the same individual, sanctions may still be imposed. [Korean Version]
2024.08.21

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Enforcement of Amendments to the Unfair Competition Prevention Act and Patent Act Strengthening Protection for Rights Holders The amendments to the Unfair Competition Prevention and Trade Secrets Protection Act (the “Unfair Competition Prevention Act”) and the Patent Act will soon come into force on August 21, 2024. The main points of the amendments to the Unfair Competition Prevention Act and the Patent Act are as follows: (1) Increased criminal penalties: Criminal fines for unfair competition violations and trade secret misappropriation by corporations have been increased to up to three times the statutory maximum that can be imposed on an individual, and the statute of limitations for corporations has been extended from the current five years to ten years. (2) Enhanced punitive damages: Punitive damages of up to five times the actual damages may be awarded for willful acts of infringement, including infringement of patents, breach of exclusive license rights, theft of ideas and misappropriation of trade secrets. (3) Introduction of stronger administrative measures: A system for the issuance of corrective orders by the Commissioner of the Korean Intellectual Property Office (“KIPO”) has been established for acts of unfair competition, and a fine of up to KRW 20 million may be imposed for failure to comply with a corrective order. (4) Increased availability of evidence in civil proceedings: It is now possible for parties to inspect and request copies of materials related to administrative investigations, and the Commissioner of KIPO cannot refuse a court’s request to provide records without a legitimate reason. These amendments are interpreted as part of the government’s overall efforts to deter technology leakage and acts of unfair competition, which have been causing significant damage to the industry recently. To this end, the government launched a government-wide joint technology leakage response team on November 8, 2023, and approved the KIPO Technology Police as a standing organization on February 27, 2024. Further, the government amended the Judicial Police Service Act on January 16, 2024 to expand the scope of KIPO investigations, which were previously limited to the illegal acquisition, use and disclosure of trade secrets, to include a full range of trade secret misappropriation offenses, including preparatory acts, conspiratorial acts and unlawful possession. In addition, on March 25, 2024, the Supreme Court Sentencing Commission enhanced sentencing guidelines for trade secret misappropriation and technology infringement offenses (e.g., imprisonment of up to 12 years, as opposed to the current nine years, for overseas leakage), and strengthened probation guidelines (applicable to cases prosecuted on or after July 1, 2024). As civil and criminal penalties for intellectual property offenses increase, it will be all the more important for companies to establish and implement rigorous compliance systems throughout their operations. In addition, companies or individuals who are victims of intellectual property offenses or have concerns that their rights may have been infringed, should consider taking a more aggressive stance in enforcing their rights, as effective legal action is now more readily available. [Korean Version]
2024.08.16

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“Outstanding” in All Categories and 65 “Leading Lawyers”

Kim & Chang was named “Outstanding” in all 24 categories in the 2024 edition of asialaw, once again receiving the highest recognition across all surveyed categories. Moreover, 65 of our attorneys and patent attorneys were recognized as “Leading Lawyers.”
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Kim & Chang Ranked “Tier 1” in All Eight Practice Areas

Kim & Chang once again received “Tier 1” (top-tier) rankings in all areas surveyed for Korea in the 2024 edition of IFLR1000. Additionally, 54 of our attorneys were recognized as leading lawyers in their respective practice areas.
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151 Professionals Selected as “National Leaders”

In the 2024 edition of WWL: Korea, 151 professionals across 22 fields were selected as “National Leaders” in their respective fields. This year, our firm obtained the most listings out of all Korean law firms once again, demonstrating the expertise and extensive capabilities of our professionals.
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