In 2005, a new market structure was instituted in Korea, pursuant to which the Korea Stock Exchange, Korea Securities Dealers Automated Quotations system (‘KOSDAQ’) and the Korea Futures Exchange (each of which had previously operated as independent markets) became divisions of a single exchange system formally designated as the Korea Exchange (the ‘KRX’). These market divisions are currently referred to, respectively, as the Stock Market Division, the KOSDAQ Market Division and the Futures Market Division of the KRX. While this consolidation did not result in any major changes in the basic operations and functions of the respective market divisions, it has led to significant gains in efficiency and convenience, including, for example, the ability of customers to use a single trading account for transactions in all KRX market divisions, rather than requiring separate accounts for trading in each market category.
The Stock Market Division of the KRX serves as the main securities exchange system for the securities of listed corporations. Bonds are also listed with the Stock Market Division and a bond listing system has been established which allows applications for the listing of bonds to be made through the internet. The KOSDAQ Market Division of the KRX serves as an exchange system for the securities of small and medium-sized companies and venture-type companies with high potential for growth and productivity, but which typically may not meet all conditions necessary for listing with the Stock Market Division. The Futures Market Division serves as an exchange system for diverse, tradeable option products, such as interest futures, currency futures, stock-related futures and other general categories of futures.
As of December 2005, 1,620 corporations were listed on the KRX (702 with the Stock Market Division and 918 with the KOSDAQ Market Division), with the various securities issued by such corporations reaching a total of 1,789 separate securities listings (858 securities listings with the Stock Market Division and 931 securities listings with the KOSDAQ Market Division). For the same period, the aggregate market value of securities listed on the KRX was KRW 726 trillion, while the aggregate trading value came to KRW 1,232 trillion.
In the Futures Market Division, the trading volume consisted of 2.59 billion contracts (which includes a total of 2.57 billion equity-index products, 11 million interest-rate products and 2.6 million currency and other products). The Futures Market Division trading value totalled approximately KRW 4,560 trillion (which includes an aggregate of KRW 3,188 trillion for equity-index products, KRW 1,234 trillion for interest-rate products and KRW 136 trillion for currency and other products). Open interests consisted of a total of 3.55 million contracts (which includes a total of 3.38 million equity-index products, 81,000 interest-rate products and 85,000 currency and other products.)
With respect to bonds, as of the end of 2005, the number of listed issues was 8,402, and the aggregate par value of listed bonds that remained outstanding was KRW 721 trillion. The aggregate trading volume for the year 2005 was KRW 362 trillion.
The KRX recognises the necessity of expanding its flow of listings in order to continue making important advances in the development of the KRX markets. As one recent initiative in this direction, the KRX has recently adopted a policy of actively encouraging new listings on the KRX by eligible foreign corporations.
2. OVERVIEW OF THE CAPITAL MARKET REGULATORY STRUCTURE
The Korean Securities and Exchange Act (‘SEA’) and regulations promulgated under it govern such matters as public offerings and tender offers of securities, restrictions against insider trading (see section 7 below) and market price manipulation, as well as requirements for the filing of reports on substantial shareholdings (see section 8.1 below).
At the ministerial level, the Ministry of Finance and Economy (‘MOFE’) is responsible for implementation of the provisions of the SEA and related regulatory matters. At the administrative level, the Financial Supervisory Commission (‘FSC’) and its administrative arm, the Financial Supervisory Service (‘FSS’), are the principal governmental agencies responsible for enforcement and supervision of matters governed by the SEA and related regulations. Each of the foregoing regulatory bodies is also responsible for formulating related guidelines and rules within the scope of discretion granted to them under the SEA.
Within this overall regulatory scheme, the KRX has the authority to establish listing requirements, public disclosure requirements and various detailed rules applicable to KRX listings and trading activities.
In addition to the SEA, other laws that are particularly relevant to the capital market include the Monopoly Regulation and Fair Trade Act (‘MRFTA’), the Foreign Exchange Transaction Act (‘FETA’) and the Foreign Investment Promotion Act (‘FIPA’).
The MRFTA governs anti-trust/fair trade issues and the Korean Fair Trade Commission is the governmental body principally responsible for overseeing compliance with MRFTA provisions and related regulations.
The FETA and related regulations govern transactions involving foreign parties, foreign currencies and/or foreign-currency denominated securities. The MOFE and the Bank of Korea (‘BOK’) are responsible for overseeing compliance with the various requirements imposed under the FETA and the regulations promulgated under it, which are of particular relevance to foreign investment in Korean securities. It should be noted that the FETA regulations pertaining to foreign exchange transactions have become increasingly lenient in recent years, generally shifting away from a system requiring MOFE or BOK approvals toward a more simplified reporting system, including simplified reporting requirements that can be satisfied by filing with the filer’s designated foreign exchange bank in Korea. Ultimately, it is expected that FETA will be repealed by the end of 2008.
FIPA (which is further discussed in section 12 below) governs various categories of investment by foreigners deemed to be particularly beneficial to the Korean economy. The Ministry of Commerce, Industry and Energy oversees compliance and implementation matters relating to FIPA.
3. PUBLIC OFFERINGS – OVERVIEW
In Korea, a public offering is defined as occurring, and related public offering regulations become applicable, when, within any six-month period: (i) with regard to newly issued securities, 50 or more persons have received solicitations for bids to buy the relevant securities or (ii) with regard to outstanding securities, 50 or more persons have received solicitations for bids to buy or offers to sell the relevant securities outside the KRX system.
Financial institutions and specially related parties of the issuer of the securities are excluded when calculating whether such 50-person threshold has been reached in any particular case.
However, in the case of newly issued securities, even if the solicitations for bids to buy the securities in question are made to fewer than 50 persons, an issuance may still be legally ‘deemed’ as constituting a public offering if there is any possibility that the securities can be transferred to 50 or more persons within one year from the date of issuance. The determination of whether there is a deemed public offering is made by reference to such factors as the type of security involved, the minimum denomination, and applicable restrictions set forth in the terms and conditions of the security.
Any domestic or foreign corporation intending to issue securities (except for certain securities such as beneficiary certificates, or bonds issued by securities companies) in a public offering for the first time in Korea is required to register with the FSC. (With respect to the registration of the corporation – as opposed to registration of specific securities – this is a onetime registration.)
A corporation that has registered with the FSC (‘Registered Corporation’) in connection with a public offering, even if such corporation is not listed with the KRX, is required to make further public disclosures whenever any of the following events occur: (i) when any bank drafts or promissory notes issued by the corporation are dishonored; (ii) when the corporation’s banking transactions/privileges are suspended or prohibited; (iii) when all or materially all of the substantial business activities of the corporation are discontinued; or (iv) the occurrence of any other event having a material effect on the corporation, such as a resolution by the board of directors of the corporation for an increase or reduction of capital. Additionally, all Registered Corporations are required to submit to the FSC standard corporate documents, such as the corporation’s balance sheet, profit-and-loss statement, and surplus appropriation statement within 90 days following the end of each fiscal year,
Corporations that intend to sell securities in a public offering (or in circumstances that would constitute a deemed public offering) in which the total trade value is to be KRW 2 billion or more are required to file a registration statement with the FSC. The registration statement will then become effective only at the end of a prescribed waiting period following the date of the FSC’s formal acceptance of the registration statement. The applicable prescribed waiting period is determined as follows: (i) a period of 15 days in the case of an offering or sale of unlisted stock, a period of 10 days with respect to an offering or sale of the stock of a corporation whose stock is listed with the KRX (‘Stock-Listed Corporation’), or a period of seven days with respect to a Stock-Listed Corporation’s allocation of shares for distribution to shareholders for consideration or subscription by a third-party investor; (ii) a period of seven days with respect to an offering or sale of debt securities; and (iii) 15 days with respect to the offering or sale of all other types of securities. Accordingly, the issuer must wait until the end of the applicable waiting period, at which time the registration statement becomes effective, before proceeding with the offering or issuance of the relevant securities.
The above-mentioned registration statement must be submitted in the Korean language using the standard form prescribed by the FSC, and attaching any required supporting documentation. Electronic filings are permitted.
The issuer of securities must also prepare a prospectus and related offering documents that are consistent with the information provided in the registration statement filing. On or after the date on which the registration statement becomes effective, the formal prospectus may be used in connection with the offering and sale of the securities. Between the date on which the FSC accepts the registration statement filing and the effective date of the registration statement, however, a preliminary prospectus should be used in lieu of the formal prospectus.
In the event that a corporation makes an offering for which the aggregate offering price is less than KRW 2 billion (a ‘low-amount offering’), such corporation is not required to file a registration statement with the FSC. In such cases, however, the corporation is still required to submit to the FSC documentation describing the corporation’s financial and business status, as well as the offering method and offering documents to be used in connection with the planned offering. (The aforementioned requirement for submission of documentation concerning the corporation’s financial and business status applies only to unlisted corporations and must be submitted prior to proceeding with the relevant low-amount offering. The requirement for submission of information concerning the documents and offering method to be used in the relevant low-amount offering applies to both listed and unlisted corporations and must be submitted promptly after the offering is made.)
In Korea, only securities companies and banks that are licensed to engage in securities business activities are permitted to act as brokers/intermediaries in handling securities subscriptions, transfers, marketing, and other related activities with respect to offerings of securities to Korean investors.
In the event that an issuer desires to place securities in a private offering (or offering classified as a deemed public offering), the issuer may offer such securities directly to investors without any assistance from a licensed securities company. However, if an issuer desires to place securities in a public offering, a licensed securities company must be involved in the role of underwriter. If the securities issuance is relatively small, a single securities company would be sufficient to handle the transaction; in the event that the issuance is relatively large, however, multiple securities companies may form as a consortium of underwriters, with one of such companies taking on the role of lead manager for the issuance.
In a typical public offering procedure for shares of stock, investors are required to submit, to the subscription handling department of the designated securities company, on the date of subscription, two copies of the subscription agreement for the relevant stock, together with the deposit of an amount equal to subscription price stated for such stock (which is required to be held in escrow as evidence of the ready availability of funds for the payment of the subscription price). The fees payable to any securities company in respect of a particular offering and issuance of new shares can be deducted and paid from the subscription price paid for the shares only after the full amount of such subscription price (as stated in the board resolutions authorising the stock issuance) have been paid into the relevant bank account of the issuer and the related capital increase of the issuer has been formally registered.
4. LISTING
The listing requirements of the Stock Market Division of the KRX that are applicable to domestic and foreign corporations can be divided into two broad categories, namely: (i) quantitative requirements based upon objectively applied standards; and (ii) qualitative requirements, which rely on the judgment and analysis of the KRX with regard to a corporation’s general suitability for listing, as determined from the perspective of policies intended to serve general public interests and the protection of investors.
There are a total of 16 quantitative requirements, including, for example, requirements in relation to the following: (i) the corporation’s operating history (ie, three years or more must have passed since incorporation); (ii) the corporation’s equity capital and minimum share listing (ie, the corporation must have at least KRW 10 billion (approximately $10 million) in equity capital and 1 million or more shares to be listed); (iii) the sales requirement (ie, the total sales/business volume of the corporation’s most recently concluded fiscal year must be at least KRW 30 billion (approximately $30 million) and the average annual sales/business volume for the past three fiscal years should be KRW 20 billion (approximately $20 million); and (iv) various matters relating to share distribution.
The listing requirements of the KOSDAQ Market Division of the KRX tend to be less demanding, with consideration being given to technology and growth potential of venture companies, since the purpose of the KOSDAQ is to facilitate listing of venture-type companies and small and medium sized companies.
In cases where a corporation intends to make an initial listing with the KRX, such corporation’s largest shareholder (and specially related persons) must deposit their voting shares (including, certificates representing any securities convertible into new voting shares, such as convertible bonds, bonds with warrants, warrants and exchangeable bonds, hereinafter, together with voting shares, collectively referred to, together with ordinary voting shares, as ‘Equity Securities’) held by such shareholder (and specially related persons) with the Korea Securities Depository (i) for a period of six months following the date of listing, in the case of a listing with the Stock Market Division of the KRX, and (ii) for a period of one year in the case of a listing with the KOSDAQ Market Division of the KRX.
The listing process essentially consists of three major phases: the preparation phase; the preliminary listing application phase; and the IPO and listing phase.
During the preparation phase: (i) auditors approved by the Securities and Futures Commission carry out an audit with respect to the corporation’s most recently concluded fiscal year; (ii) the corporation appoints a lead manager/arranger for the listing and IPO, and amends the company’s articles of incorporation to reflect and accommodate provisions of the SEA and other relevant laws and regulations applicable to listed corporations; and (iii) the corporation is registered with the FSC as an issuer of publicly offered securities (see section 3.2 above).
In principle, a contract with the lead manger must be executed three months before the request for the preliminary regulatory review of the listing is made. Subsequent to appointment as a lead manager, the lead manager, together with a law firm retained by him, performs financial, business and legal due diligence on the listing corporation, and, depending on the outcome, the company makes appropriate amendments to its articles of incorporation in anticipation of the IPO and listing. Although the request for the preliminary regulatory review is submitted at the end of the preliminary listing application phase, the corporation must keep in close contact and communication with the related regulatory authorities such as the KRX, the FSC and the FSS and make appropriate changes if requested by the regulatory authorities to the preliminary application documentation, the corporation’s articles of incorporation or the corporation’s registration statement, as the case may be.
During the preliminary listing application period: (i) the corporation’s board of directors or shareholders’ meeting passes relevant resolutions to authorise the listing; (ii) a commitment letter for the required deposit of the Equity Securities of the largest shareholder (and specially related persons) is obtained from such shareholder; and (iii) a preliminary regulatory review of the proposed listing is requested. The preliminary regulatory review usually takes one to one and a half months to complete. Following receipt of the results of the KRX’s preliminary regulatory review, the process moves into the IPO and listing phase.
During the IPO/listing period, the corporation files the registration statement, makes the initial public offering (IPO), and then submits the application for listing.
Costs associated with a listing include fees payable to the KRX for: (i) preliminary review of the proposed listing, and (ii) for the listing itself. The preliminary review fee is KRW 5 million and applies only with respect to the listing of shares of stock. The listing fees are assessed based on the type and the price of the listed securities (eg, Korea Depositary Receipts, foreign stock, bonds, beneficiary securities and equity-linked warrants). The listing fee rates applicable to the listing of shares of domestic corporations fall in the range of 0.04 per cent to 0.001 per cent (depending on the aggregate price of the stock to be listed). In the event that the total amount of listing fees exceed the amount of preliminary review fees paid to the KRX, the preliminary review fee amount is applied toward the listing fees by deducting such amount from the total amount of listing fees to be paid.
For the listing of foreign companies’ stock and depository certificates based on underlying share certificates of foreign companies, the listing fees are determined by reference to the number of shares and depository receipts to be listed.
Additionally, where a corporation is offering securities in a public offering and has filed the required registration statement with the FSC, it must pay a fee in the amount of (i) 1.8/10,000 (ie, 0.018 per cent) of the total issue price, in the case of an offering of stock, and (ii) 4/10,000 – 9/10,000 (ie, 0.04 – 0.09 per cent) of the total issue price depending the length of the maturity, in the case of an offering of debt securities.
5. DISCLOSURE OBLIGATIONS
Pursuant to the SEA and related disclosure regulations, as well as the KRX’s disclosure regulations, corporations that have listed securities with the KRX (‘Listed Corporations’) and Registered Corporations (as defined in 3.2 above) are required to satisfy certain public disclosure obligations. Such disclosures are usually done by way of electronic filings. Since the disclosure requirements for Registered Corporations have been discussed already, the following discussion pertains only to the disclosure requirements for Listed Corporations.
Listed Corporations are required to: (i) prepare and file, within 90 days from the end of each fiscal year, an annual report and (ii) prepare and file, within 45 days following the end of each of the 1st, 2nd and 3rd quarters of each fiscal year, a quarterly report or a semi-annual report, as the case may be; and (iii) corporations that are classified as belonging to a large enterprise group (conglomerate) are required to file consolidated annual financial statements to the FSC and KRX within six months following the end of each fiscal year.
A Stock-Listed Corporation must publicly disclose all material facts and developments related to it that may affect the investment decisions of a reasonable investor, such as significant matters proposed to be resolved at the corporation’s shareholders’ meetings or the nature of any significant resolutions adopted by any meeting of the board of directors or shareholders. Although the regulatory provisions governing disclosure provide an illustrative list of relevant types of events that should be disclosed, the list is by no means exhaustive. Depending on their nature, certain events that trigger disclosure requirements must be reported on the same day that the event occurs, while other types of events may be disclosed on the following day.
Any Stock-Listed Corporation must also make prior reports to the FSC with respect to such things as mergers, business transfers, and comprehensive transfers of stock, exchanges of stock or corporate spin-offs, including with such disclosures a summary of the transaction and a detailed description of the relevant parties.
Additionally, pursuant to fair disclosure regulations, whenever a Stock-Listed Corporation intends to provide material information, such as future business plans, management plans, and operational results (which has not been disclosed or made available to the public) to any select investor or group of investors, such information must also be disclosed immediately to the public.
6. CORPORATE GOVERNANCE
In Korea, commercial enterprises are predominantly organised in the form of stock corporations (in Korean, chusik hoesa). In principle, a corporation must have three or more directors on its board, with each serving a three-year term. Those corporations with less than KRW 500 million aggregate par value of issued stock, however, may have only one or two directors. Stock-Listed Corporations must also appoint a number of outside directors in order to ensure greater transparency in corporate management and a healthy system of checks and balances in corporate governance. If the total asset value of a Stock-Listed Corporation exceeds KRW 2 trillion, then its board must have no fewer than three outside directors and such outside directors must constitute a majority of the board. If the total asset value of a Stock-Listed Corporation does not exceed KRW 2 trillion, then outside directors must comprise more than a quarter of the board’s directors. To qualify as an outside director, a person must meet certain minimum standards of professional expertise and experience deemed essential to the performance of their duties as directors and must not have any special interests or conflicts of interests with respect to the corporation on whose board they serve.
For a corporation with two or more directors, the corporation must have at least one representative director with the authority to conduct the business of the corporation. The representative director or his/her designee (by way of an appropriate power of attorney) has the power to represent and act for the corporation in accordance with decisions and policies adopted by the board of directors or as generally delegated to the representative director by the board. The representative director’s name, resident registration number and address must be registered with the corporate registry in Korea, in order to ensure that the public can independently confirm who has been appointed to serve as representative director of the corporation and who is authorised to act on behalf of the corporation.
Corporations having two or more directors are generally required to place ultimate decision-making authority in the hands of the board of directors for all matters related to the day-to-day and general operations of the company. However, a corporation’s board of directors may also delegate some areas of decision-making authority to the representative director.
All corporations must have full or part-time auditors or establish an audit committee responsible for auditing the corporation’s operations. Stock-Listed Corporations must have at least one or more full-time auditors or an audit committee, if the corporation’s total asset value is KRW 100 billion or more. (If the corporation’s total asset value is KRW 2 trillion or more, an audit committee is required.) When voting on the appointment of an auditor or member of an audit committee, shareholders who hold more than three per cent of the outstanding voting stock of the corporation cannot exercise their voting rights in respect of any more than three per cent of the voting shares of the corporation.
7. INSIDER TRADING
The SEA contains several provisions against use of inside information by insiders (such as management and majority shareholders) to gain unfair advantage or profits in securities transactions.
More specifically, the SEA prohibits any person who acquires inside information (ie, information of the corporation that has not been publicly disclosed) in connection with their duties or position within a corporation, as well as any persons who have received such information from an insider, from using such information in connection with securities transactions or allowing a third party to use such information in a securities transaction. The specific categories of persons who are subject to such insider-trading prohibition are listed in the SEA, and include each of the corporation and the corporation’s officers, employees and major shareholders. Insiders continue to be subject to inside-trading restrictions for up to a year after the termination of the employment or insider status of the relevant insider. With respect to the foregoing, information is no longer classified as insider information when: (i) it has been disclosed pursuant to relevant disclosure regulations and thereby has been publicly available for a period of 24 hours or more; (ii) it has been published in two or more nationally distributed newspapers and one day or more has passed since the date of publication; or (iii) it has been broadcast by broadcast media having a national audience and 12 hours or more have passed since the time of the relevant broadcast.
Additionally, officers, employees or major shareholders of a Stock-Listed Corporation are prohibited from engaging in short-swing trading with respect to the securities of such Stock-Listed Corporation. In cases where such short-swing trading occurs, the corporation may demand that the relevant persons disgorge to the corporation any profits gained from such trading within the six-month period immediately following the relevant transaction. In this context ‘major shareholder’ refers to any person who: (i) holds, or for whose account are held, 10 per cent or more of the outstanding voting shares (whether such shares are formally held in the name of the shareholder or in some other name); and/or (ii) has substantial actual influence with respect to material managerial decisions affecting the corporation, such as influence over the appointment/termination of directors.
8. REPORTS ON SUBSTANTIAL SHAREHOLDINGS
Upon reaching a shareholding ratio of five per cent or more of the issued and outstanding Equity Securities of a Stock-Listed Corporation, a shareholder is required to file a report to authorities within five days following the date on which such shareholding threshold was reached. Thereafter, any change, whether by reduction or increase, in the shareholding ratio of such shareholder, where the net reduction or increase accounts for one per cent or more of the issued and outstanding Equity Securities of the relevant corporation, must also be reported within five days following the date on which such one per cent change threshold was reached. The scope of such substantial shareholding reporting requirement includes any particular holder of Equity Securities together with specially related persons who also hold Equity Securities of the relevant Stock-Listed Corporation. Accordingly, by way of example, if a parent corporation and its wholly owned subsidiary each own Equity Securities of a Stock-Listed Corporation, the shareholding ratios (including in such calculation all Equity Securities held) of both the parent corporation and the subsidiary will be counted together for the purposes of calculating whether the five per cent or one per cent thresholds have been reached. Similarly, if two members of the same family own Equity Securities in a particular Stock-Listed Corporation, their combined shareholding ratios will be counted for the purpose of determining whether the relevant shareholding ratio threshold has been reached.
In this context, the term ‘specially related person’ refers to: (1) with respect to natural persons, persons related by blood; (2) with respect to corporate entities, corporate affiliates, shareholders or persons in positions of managerial influence; and (3) other parties to any agreement regarding the purchase and disposal of Equity Securities and/or the exercise of voting rights with respect to the target corporation. Additionally, for the purposes of determining whether any special relationship exists based on shareholding relationships, the concept of shareholding is interpreted broadly to include not only shareholders of record, but also beneficial owners of Equity Securities and various types of arrangements where stock may be held by one person for the account of another.
The required content of the substantial shareholding reports differs according to the purpose behind the acquisition of the relevant Equity Securities (ie, whether the Equity Securities are obtained for purely investment purposes or to acquire managerial control with respect to relevant Stock-Listed Corporation).
In cases where the reporting shareholder has acquired the Equity Securities for investment purposes only, the substantial shareholding report must include: (i) basic information on the reporting party; (ii) a description of the issuer of the Equity Securities; (iii) information on the reporting party’s shareholding status; (iv) a detailed description of the circumstances of any change of shareholding status (in respect of any change relating to one per cent or more of the issued and outstanding Equity Securities of the relevant Stock-Listed Corporation).
In cases where the reporting shareholder has acquired the Equity Securities in order to gain influence over the management of the Stock-Listed Corporation, in addition to the content described above for the investment-purpose substantial shareholding report, various other matters must be included, such as a more detailed description of the purpose of shareholding, a description of agreements entered into in connection with the relevant Equity Securities acquisition and shareholding, and a description of the source of funding for the relevant Equity Securities acquisition. Shareholders who have filed a substantial shareholding report relating to the acquisition of managerial influence are not allowed to exercise voting rights pertaining to the acquired Equity Securities or to acquire any additional Equity Securities for a period of five days following the date of the filing of the report.
In addition to the above-described reporting requirements: (i) any person who becomes a director, auditor or officer of similar status in a Stock-Listed Corporation must file a report to the Securities and Futures Commission and the KRX, regarding such person’s shareholding status (including all shares held for the account of such person, regardless of the name under which such shares are held) within ten days from the date of his or her appointment to such position; and (ii) any person who becomes a major shareholder (as defined in section 7) must report such major shareholder status to the Securities and Futures Commission and the KRX within 10 days from the date that such major shareholder status was attained.
8.3 Substantial shareholding in financial institutions
A person cannot acquire and hold ten per cent or more of the voting shares of a bank unless otherwise expressly permitted by the FSC. A holder of shares issued by a bank must file a report to the FSC in each of the following cases: (i) where the shareholder comes to hold four per cent or more of the voting shares of the bank; (ii) pursuant to the filing of the report described in (i), where there is a change of the shareholder’s shareholding ratio relating to one per cent or more of the issued and outstanding shares of the bank; or (iii) where the shareholder becomes the largest shareholder of the bank.
Any person who desires to be the controlling shareholder of a securities company, asset management company or insurance company must obtain prior approval from the FSC. The precise definition of controlling shareholders may vary somewhat in each context. Generally the persons who may constitute the controlling shareholders will include the largest shareholder, major shareholders and any shareholders who have special relationships to the largest shareholder.
9. TENDER OFFERS
If any person intends to acquire, participate in bidding for, or otherwise obtain or purchase the Equity Securities of a Stock-Listed Corporation from ten or more persons outside the KRX market mechanisms, pursuant to which such person will come to own five per cent or more of the issued and outstanding Equity Securities of such corporation, the acquisition(s) must be made through a tender-offer process. No tender-offer process is required in the following cases: (i) acquisition through the KRX of Equity Securities in a Stock-Listed Corporation; (ii) acquisition of Equity Securities in a corporation other than a Stock-Listed Corporation; or (iii) acquisitions involving the sale and purchase of Equity Securities among affiliates within a large enterprise group or between members of the same family by an insider of a corporation.
Any person who plans to proceed with a tender offer is required to publish the relevant tender-offer plan in a public newspaper and submit a tender-offer statement to the FSC on the same day. A copy of the tender-offer statement should subsequently be sent to both the issuer of the stock to be acquired and to the KRX. In principle, any person who makes a tender offer should acquire the relevant stock only during the relevant tender-offer period (ie, the period starting on the filing date of the tender-offer statement and ending on the tender-offer termination date stated in the tender-offer statement).
In the event that a hostile merger and acquisition is contemplated to be made through the tender-offer process, the existing controlling shareholder of the target company can make a counter tender offer. Furthermore, the issuer of the target securities may undertake to issue additional voting shares to counter such tender offer; provided, however, that the directors who approve the issuance of new shares may be liable for a breach of fiduciary duties to other shareholders if the purpose of such new issuance is solely to protect the controlling interest of the existing controlling shareholder.
10. INDIRECT INVESTMENT FUNDS
10.1 Regulatory framework
The Indirect Investment Asset Management Business Act (‘IIAMBA’) governs various forms of indirect investment activities, such as the management of funds collected from various investors for investment in securities, derivatives and/or other assets (including real estate) and distribution of profits derived from it back to the investors. Presently, there is some overlapping of laws and regulations that are applicable to indirect investment activities and relevant indirect investment vehicles, which may be established and operated under applicable provisions of the Real Estate Investment Company Act; Support for Small and Medium Enterprise Establishment Act; Industrial Development Act; the Act on Private Participation in Infrastructure; the Overseas Resources Development Business Act; and the Act on Special Measures for the Promotion of Venture Businesses. The various statutory and regulatory provisions that govern indirect investment matters, such as types of investment vehicles allowed, management methods and supervising regulatory authority, are to some extent inconsistent. (As IIAMBA itself represents a legislative effort to consolidate the regulation of the area of indirect investment business activities, it is expected to constitute an important element of more comprehensive capital market consolidation legislation that is referred to in section 13 below.)
10.2 Establishment of indirect investment vehicles and marketing of indirect investment securities
The forms of legal entities prescribed under the IIAMBA for use as indirect investment vehicles are chusik hoesa (standard stock corporations), investment trusts, and hapja hoesa (similar to limited partnerships). The hapja hoesa form of investment vehicle is used only for private equity investment purposes. Registration with the FSC of any investment vehicle to be established in the form of a chusik hoesa or hapja hoesa must be completed prior to the establishment of such vehicle. With respect to investment trust form of investment vehicle, however, a report can be filed with the FSC after the establishment of the trust.
There is no requirement for the filing of a registration statement with respect to the securities issued by any indirect investment vehicle (eg, shares, beneficiary certificates, or investment units), even when such securities are publicly offered. However, any prospectus to be used in the marketing of such securities must be prepared and filed with the FSC or Asset Management Association of Korea (in applicable cases) before it can be distributed to potential investors. Securities companies banks, insurance companies, futures brokerage firms, merchant banks and securities finance companies are permitted to market the securities issued by indirect investment vehicles (‘Indirect Investment Securities’).
10.3 Sales of foreign indirect investment securities
In the event that a foreign indirect investment vehicle intends to market Indirect Investment Securities to Korean investors, it must appoint a domestic sales agent and conduct the related marketing through such agent. Additionally, if marketing efforts are intended to reach investors other than sophisticated investors under the IIAMBA, then the company must submit documentation/information to the FSC regarding the general terms and conditions of any relevant trust agreement, articles of incorporation (of the fund and asset management company) and the prospectuses of the fund and the asset management company. (In such cases, the submission to the FSC is handled by the appointed domestic sales agent.)
10.4 Private funds
Regulations are less strict with respect to the operation/management of private funds, which in this context refers to: (i) any indirect investment vehicle whose investors are (1) institutional investors, (2) institutional funds (eg, retirement funds, foundations, etc.), (3) individuals who purchase securities in the amount of KRW 10 billion or more, or corporations that purchase securities in the amount of KRW 50 billion or more, or (4) persons who have entered into blind trust agreements in compliance with the provisions of the Act on Ethics in Public Service (each of the foregoing (1)-(4) being classified as ‘sophiscated investors’ under IIAMBA), regardless of whether the number of investors is 30 or more; or (ii) any indirect investment vehicle whose total number of investors is 30 or less (excluding investors classified as sophiscated investors under IIAMBA). IIAMBA sets forth special provisions with respect to regulating such things as investment management (particularly in relation to portfolio composition), reporting requirements, etc, with regard to private funds.
11. ASSET MANAGEMENT COMPANIES AND DISCRETIONARY INVESTMENT MANAGEMENT COMPANIES
11.1 Regulatory framework
The IIAMBA regulates the activities of asset management companies, investment advisors and discretionary investment managers.
11.2 Asset management companies
In principle, only companies that are licensed by the FSC are permitted to manage the assets of indirect investment vehicles. The law does not, however, require licensing of managers of private equity funds organised in the form of hapja hoesa.
Because asset management companies play such a central role in the indirect investment market, they are required to meet certain minimum standards designed to protect investors. For instance, an asset management company must have a minimum paid-in capital of KRW 10 billion and must have at least one compliance auditor responsible for monitoring the company’s compliance with the regulatory requirements. Strict statutory and regulatory standards apply with respect to the liabilities of asset management companies in cases where they have breached their obligations under relevant laws and regulations, a relevant trust agreement or the articles of incorporation of the investment vehicles they manage, or where they have otherwise been negligent. Asset management companies are also liable if they are materially in breach of representations made in an applicable investment prospectus.
Under the IIAMBA, any person engaged in the business of evaluating investment assets and providing advice on investment decisions is classified as an investment advisor and any person entrusted with making all or some discretionary investment decisions on behalf of a client/investor is classified as a discretionary investment manager. Under the IIAMBA, investment advisors and discretionary investment managers must be registered as such with the FSC and must meet related standards established by the FSC.
Foreign persons who intend to provide investment advisory or discretionary investment management services to Korean residents must also be registered with the FSC and meet the applicable standards. (This registration requirement applies even in cases where the relevant foreign party does not maintain any offices or permanent place of business in Korea.) Investment advisors or discretionary investment managers who register with the FSC but do not maintain business offices in Korea are allowed to provide services only to sophisticated investors under the IIAMBA.
12. FOREIGN INVESTMENT
Under the FIPA, investment by a foreigner (individual or company) of KRW 50 million or more into a Korean company will qualify as a FIPA foreign investment (‘Foreign Investment’) if it falls into any one of the following circumstances: (i) acquisition by the foreign investor of 10 per cent or more of the voting shares of a Korean company; (ii) acquisition of a managerial role in a Korean company (eg, acquiring the right to appoint directors or key managers of the company in cases where less than 10 per cent of the company’s voting shares are acquired); (iii) entering into an agreement with a Korean company to provide qualifying raw materials and products or to purchase the same over a period of one year or more; and (iv) entering into an agreement with a Korean company regarding technology transfers or joint research and development projects. In order to obtain formal classification as a Foreign Investment, a related report should be filed to a designated foreign exchange bank or the Korea Trade Investment-Promotion Agency. Direct investment made pursuant to such report and classification as a Foreign Investment is entitled to certain FIPA tax benefits and enhanced investor protection and support that are not available in the context of ordinary investments in securities.
In the event that an investment by a foreign investor does not qualify as a Foreign Investment, such foreign investor is required to open a dedicated securities investment account in Korea for use in connection with the purchase or sale of certain types of Korean securities. In other cases, the foreign investor may be required to file a prior report to a designated foreign exchange bank in Korea, or to the Bank of Korea, depending on the nature of the particular purchase or sale of Korean securities.
Additionally, in order for a foreign entity to acquire listed securities, such entity must first register as a foreign investor with the FSC and obtain an investor registration number. Unless a limited range of compelling reasons can be proven, the Korean securities acquired by a foreign investor are required to be deposited with a domestic custodian. In connection with the above, it should be noted that, except for acquisition of listed securities pursuant to the filing of a FIPA report for a qualifying Foreign Investment and except for a very limited range of other circumstances, it is nearly impossible for a foreign investor to acquire the securities of a listed corporation outside of the KRX market system.
13. RECENT DEVELOPMENTS
Recently, the MOFE has commenced a long-term programme for consolidating approximately half of the pre-existing statutory and regulatory framework governing the capital market in Korea (excluding certain areas, such as those covered by the Banking Act and the Insurance Business Act).
Whereas the pre-existing statutory and regulatory framework primarily focused on the regulation of specific types of financial institutions (which has led to sometimes inconsistent regulatory requirements in areas where the permitted activities of different types of financial institutions have overlapped), the MOFE, in conjunction with legislative initiatives of the Korean National Assembly, has been implementing a regulatory scheme focused primarily on financial functions and broad categories of financial activity. The IIAMBA is an example of a recently enacted law, and related regulatory scheme, that is focused upon integrating and systematically regulating a general category of financial activity, rather than regulating a particular type of financial institutions. In this regard, it is expected that the IIAMBA will be incorporated into a more comprehensive statutory and regulatory scheme of capital market consolidation legislation that is currently under consideration in the form of a draft ‘Act on the Capital Market and Financial Investment Services’.
In connection with this ongoing consolidation effort and the related legislation now being considered, the MOFE intends to expand the scope of permitted activities of investment companies, while simultaneously protecting investors, by prescribing a clear and comprehensively integrated set of standards for Korea’s capital market. More specifically, under the newly emerging statutory and regulatory scheme, it is anticipated that the definition of securities will be broadened to include many newly emerging financial instruments. Additionally, it is expected that the Korean Commercial Code will also be significantly amended in order to fully integrate its provisions with those of any new capital market consolidation legislation in order to ensure consistency in the legal requirements that apply to business activities and transactions in the Korean capital market.
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