"Treasury Share Cancellation Requests Allowed"... FSC Clarifies Exception Criteria for 5% Large Shareholding Disclosure Rule

Exceptions Apply to Dividends, Shareholders’ Meeting Culture Improvements, and Executive Compensation

The Financial Services Commission has clarified the specific criteria for the exceptions to the “5% rule” on large shareholding disclosures, in order to support shareholder value enhancement activities by institutional investors.

On March 6, the Financial Services Commission announced that it had provided certain interpretations regarding laws and regulations related to the 5% rule. The 5% rule requires any party, such as an institutional investor, who holds a large volume of shares to report to the Financial Services Commission and the Korea Exchange within five days if their shareholding reaches 5% or more, or if there is any change in the purpose of their holding. The report must include the current shareholding status and the purpose of the holding.

This move comes in response to repeated calls for clearer criteria regarding the exceptions to the 5% rule reporting requirements. Institutional investors, among others, are granted exceptions such as relaxed disclosure requirements and simplified reporting procedures, provided their purpose for holding shares does not involve influencing management control. The issue, however, has been the legal uncertainty surrounding these exception criteria. Up to now, the criteria have been vaguely defined as “no intention to influence management control but engaging in active types of shareholder activities” for general investment purposes, lacking specificity.

Going forward, requests for treasury share cancellation will be subject to these exceptions. In relation to the third amendment to the Commercial Act, which centers on making treasury share cancellation mandatory, demanding the cancellation of treasury shares, or requesting the execution of plans for holding or disposing of treasury shares approved by the shareholders’ meeting, will not be considered as actions aimed at influencing management control.

Requests to adhere to dividend-related indicators will also be treated similarly. Matters related to dividends were removed from the scope of “management control influence” following the January 2020 amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act. As a result, even if institutional investors request notification of dividend policy or dividend implementation plans at least once a year, such requests will be eligible for exceptions.

Unless accompanied by amendments to the articles of incorporation, activities aimed at improving the culture of shareholders’ meetings will also not be regarded as having the purpose of influencing management control. For example, requesting early disclosure of agenda items for the shareholders’ meeting to facilitate the exercise of voting rights is considered a representative case.

Requests for explanations regarding executive compensation will also be eligible for exceptions. Starting in May, with the improvement of the executive compensation disclosure system, total shareholder return and executive compensation will be disclosed together. In this context, institutional investors may request explanations about the relationship between executive compensation and company performance.

An official from the Financial Services Commission stated, “We will continue to support the active stewardship activities of institutional investors,” adding, “In addition to this legal interpretation, we plan to identify additional areas that require interpretation and reflect them in the interpretation compendium.”

This content was produced with the assistance of AI translation services.