[Editors’ note: Since the Financial Supervisory Commission (FSC) and Financial Supervisory Service (FSS) of Korea relaxed stock market regulations in late 2005 to allow initial public offering by overseas companies, 3 NOD Digital Group Co., a Chinese company, became the first foreign company to list its shares on KOSDAQ (Korea Securities Dealers Automated Quotation) market in Korea.
In order to develop capital market in Korea, the FSC and FSS had previously revised stock regulations in order for overseas companies, which are not listed on overseas exchanges, to be able to hold initial public offerings in Korea. (Before the new measures, only previously listed overseas companies were allowed to seek a secondary listing in Korea, which had been obstacle to develop the country’s capital market.) The move by FSC and FSS to facilitate listing of overseas companies came as some overseas companies had been tapping the possibility of listing on the Korean stock market.
To list shares on Korean stock market, overseas companies shall be subject to the same listing requirements. Specifically, companies should have 20 billion won of annual average sales in the past 3 years and a minimum of 10 billion won of shareholders capital in terms of listing requirements for Korea’s regular stock market. As for listing on KODAQ market, the relevant company must have been established for 3 years and its shareholder capital must be 3 billion won or more, and return on equity (ROE) must be 10% or more in regard to the latest fiscal year (or, alternatively, at least 2 billion net profit must have been recorded). (There are different listing requirements for venture-type companies, but we do not discuss them here.)
After listing, overseas companies will be able to use accounting in the U.S. or under global standards when they submit financial statement to Korea Exchange, but they will be restricted from changing those accounting principals at their discretion after the listing.
In addition, overseas companies shall be required to make disclosures in Korean language and submit Korean-language extracts of their internal documents reported to headquarters so that local investors could assess the value of their stock more safely.
Please read the below newspaper article for further information on the listing by the first foreign company 3 NOD.]
Source: Joongang Daily; Aug. 18, 2007
Chinese audio components manufacturer 3NOD Digital Group Co. [which is the holding company, Cayman Island-based, of China’s Shenzhen 3NOD Electronics Co.] listed its shares on the Kosdaq market yesterday [August 17], becoming the first non-Korean company to list shares on Korea’s stock markets. 3Nod’s shares rose to a daily limit of 15 percent on yesterday’s closing, defying prevailing stock market gloom.
3Nod Digital Group started its first trading day with a price of 3,000 won ($3.16) per share, 20 percent higher than its initial public offering price. The share price initially tumbled to 2,550 won in the morning amid a downturn stemming from global credit fears but soon rebounded to 3,450 won per share, hitting the daily limit of 15 percent growth. It closed at 3,450 won.
The company had planned to sell 12 million shares at 2,500 won each, as opposed to the highest price of 2,200 won initially marketed to investors, [according to the company’s filing to Korean regulators]. Korean and overseas institutional investors applied for 236.8 million shares, almost 25 times the 9.6 million allocated, the company said.
Korea Exchange, operator of Asia’s fourth-biggest stock market by value, is seeking to attract companies from China, Vietnam and other Asian nations to list their shares. 3NOD’s shares are the first foreign listing after Huafeng Textile International Group Ltd., a Hong Kong-based fabrics maker, delayed a planned IPO.
In Korea, the requirement of filing a public report to the Financial Supervisory Commission (FSC) of Korea and the Korea Stock Exchange upon acquiring a large shareholding (5% or more) in a publicly held corporation plays a significant part in Korean (hostile) takeover market (more so than such mechanisms as public tender offer or proxy fights), as any violation of such reporting requirement by an aggressor may result in a loss of voting rights with respect to the ownership of the shares exceeding 5%, and the FSC may issue an order to dispose of such non-reported shares. Furthermore, the aggressor may be subject to criminal sanctions such as fines or imprisonment.
In October of 2004, the Financial Supervisory Service of Korea (FSS), which is delegated the authority to enforce the 5% reporting requirement, implemented certain measures to strengthen this 5% reporting rule.
It used to be that when writing down in the report the purpose of acquiring large shareholding, the person (or entity) reporting the large shareholding was allowed to freely describe the purpose of the shareholding without having to choose from any prescribed objectives. That is, there was more focus on the accuracy of reporting about the number of shares held and type of shareholding in relation to the large shareholding, as opposed to the accuracy of the purpose of the shareholding. The reason for the foregoing seemed to be that by ensuring the accuracy of the level and extent of large shareholding, the purpose of alerting to the management of the companies which may be target of a takeover could largely be achieved, and the purpose of the shareholding would not matter much.
However, there have recently been some incidents that have exposed the shortcomings of the 5% reporting rule in connection with reporting of the purpose of large shareholding. For instance, in 2003, a foreign asset management company, when reporting about the status of its large shareholding in a domestic corporation, wrote down creation of profits as the purpose of the shareholding, but later it became apparent that the purpose was related to takeover of the corporation as it later attempted to change the incumbent management of the corporation. In another instance, certain investors who acquired as a group large stakes in a corporation declared in the report participation in the management as the purpose of the shareholding (i.e., to make it appear as an M&A deal), but the group of investors proceeded with disposal of the shares after the share price increased as a result of the public report.
Apparently aimed at resolving the above issue concerning reporting of the purpose of large shareholding, the FSS has now changed, among other things, the method of reporting the purpose. Under the new system, the person reporting the large shareholding would first be required to choose between Simple Investment and Acquisition of Control or Performance of Influence on Management in relation to the purpose of the shareholding, and, in the case of choosing the latter, is required to elaborate on such matters as the change in management officers and corporate governance structure, plan on acquiring additional shares or disposal of any shares currently owned, etc.
Prior to changing the reporting method of the purpose of large shareholding as mentioned above, there was little guidance from the FSS as pertains to the same. In fact, it had been thought that the FSS did not consider the false reporting of the purpose as “false report or omission of statement concerning material facts" which may lead to the loss of voting rights with respect to the shares exceeding 5% under the Securities Exchange Act of Korea. However, the recent measures announced by FSS appear to represent a shift in its attitude in that regard, showing more resolve to prevent any unfair acts that would confuse good-faith investors and provide fairer rules with regard to acquiring management control, by touching upon the area (i.e., the reporting of the purpose) of the 5% reporting rule that had previously been left untouched.
The Seoul High Court (15th Civil Division) recently ruled in a case (2004 Na 69047) that a securities company is liable to a customer for the failed option investment amount since the company was negligent in supervision of its employee who induced the customer into making the option investment with the company, thus confirming the lower court’s decision which ruled in favor of the investing customer in part.
The facts of the case are as follows. A customer, Y, was induced by a branch head, G, of a securities company, D, into entering option trade and entrusted to G such option trade and remitted 130 Million Won to G’s bank account. G could have avoided large losses in the option trade, but could not do so because he was late for work due to the heavy drinking the night before. And the customer Y filed a lawsuit against G’s employer D for damage compensation, and the Seoul district court ruled in part in favor of the customer G.
In rendering its decision, the High Court stated that the act of the employee G agreeing to bear losses resulting from making trade in the course of recommending securities investment to a customer is a prohibited act under the Securities Exchange Act (Paragraph 1 of Article 52 of the Securities Exchange Act), and that the employee’s act of incurring large losses to the customer, which was attributable to the employee’s delinquency in preventing loss and creation of profits, is a tortuous act. Thus the High Court said that the securities company D must compensate the customer Y as employer of G.
However, the High Court also stated that the customer is also negligent for 30% of the investment loss since the customer remitted money to G even though he was aware that the option investment with an account in another person’s name was unusual and was also totally reliant on the employee G, never making any efforts to check on the option investment through other routes.
In case a foreign investor desires to acquire publicly-listed shares of a Korean corporation, under the relevant Korean law, it is normally required for the foreign investor to acquire such shares through the stock market and not outside of the market. However, there are certain exceptions to such requirement, and we briefly discuss those exceptions and related matters thereof below.
We first note that the Securities Exchange Act of Korea (SEA) provides that if and when a foreign investor desires to acquire certain shares of a Korean company listed on KSE or Korea Securities Dealers Automated Quotation (KOSDAQ), the foreign investor is required to acquire the shares only through KSE or KOSDAQ unless the foreign investor obtains permission from the Financial Supervisory Commission of Korea (FSC) for acquisition of the shares outside of KSE or KOSDAQ, as the case may be. FSC would grant such permission to a foreign investor only if the proposed acquisition fits into limited categories, which include a “direct foreign investment” under the Foreign Investment Promotion Act of Korea (FIPA) and a “public tender offer” to an unspecified number of existing shareholders of DHC under Article 21 of SEA.
A “direct foreign investment” under FIPA means a foreign investor’s acquisition of at least 10% of total issued shares of a domestic corporation, or a foreign investor’s acquisition of less than 10% of total issued shares of a domestic corporation accompanied by (i) a secondment of an executive to the domestic corporation or a contract granting such secondment right to the foreign investor, (ii) execution of a supply contract for raw materials or other products for a period of at least a year or more, or (iii) execution of a technology license contract or joint development agreement.
Under SEA, a public tender offer is required where the purchaser and the persons who have a special relationship with the purchaser will hold 5% or more of the total issued and outstanding shares concerned as a result of the purchase of the shares outside KSE or KOSDAQ from at least 10 persons.
So, barring those “foreign direct investment” or “public tender offer” exceptions, any foreign investor desiring to acquire publicly-listed shares in Korea should enter the relevant stock market for such acquisition.
For your information, we also briefly provide below the key regulations for the foreign investors desiring to enter the Korean stock market for acquisition of shares of publicly-listed companies.
(i) Under the Securities Industry Supervision Regulation, a foreign investor who acquires listed securities for the first time will be required to register the investor’s name and other personal data with Financial Supervisory Commission of Korea (FSC).
(ii) Under the Foreign Exchange Transaction Act of Korea (FETA), a foreign resident’s acquisition of a domestic corporation’s securities is regarded as a “capital transaction” and FETA requires the relevant foreign resident to file a report to the minister of the Ministry of Finance and Economy (MOFE) about such transaction.
(iii) SEA requires that when an investor acquires 5% or more of total issued shares of a listed corporation, the investor is required to file a report to FSC and KSE on the share acquisition status within 5 days of the acquisition. In addition, if, after the acquisition, the investor changes its shareholding and the changed shareholding is at least 1% or more of total issued shares of the listed corporation, the investor is required to file a report to FSC and KSE within 5 days of the occurrence of the changed shareholding.
As seen above, from a foreign investor’s standpoint, the regulations concerning acquisition of publicly-listed shares are not easy to understand, and so it would be prudent for such investor to seek advice of a qualified Korean law firm.
The Financial Supervisory Commission (FSC), the top financial watchdog in Korea, has new chairman named Mr. Kim, Yong Duk, effective from August 6 of 2007. Mr. Kim is replacing Mr. Yoon, Jeung Hyun, who managed to become the first chairman to finish the prescribed 3-year term since FSC was established in 1998 pursuant to the Act on the Establishment, etc. of Financial Supervisory Organizations. During his tenure as chairman of FSC, Mr. Yoon was widely credited with having laid the groundwork for life insurance companies to go public and also worked to lower barriers that keep non-financial companies from owning banks. Mr. Kim, Mr. Yoon’s replacement, was economic policy advisor to President Roh before being appointed as new FSC chief.
Sometimes there is confusion as to the functions of FSC and the Financial Supervisory Service (FSS). FSC is part of Korean government under the Office of Prime Minister and consists of top bureaucrats while FSS is under the directions of FSC but is an organization independent of Korean government.
FSS monitors and supervises various kinds of financial companies and institutions and report any findings or results to FSC. FSC formulates regulations relevant to the financial institutions and supervises duties of FSS.
More specifically:
FSC consists of 9 commission members, which are as follows:
(i) The Vice Minister of Finance and Economy
(ii) The Deputy Governor of the Bank of Korea
(iii) The President of the Korea Deposit Insurance Corporation
(iv) An expert on accounting recommended by the Minister of Finance and Economy
(v) An expert on banking and finance recommended by the Chairman of FSC
(vi) An expert on law recommended by the Minister of Justice; and
(vii) A representative of business community recommended by the President of the Korea Chamber of Commerce and Industry
The Chairman of the FSC is appointed by the President of the Republic of Korea after deliberation by the State Council, and the Vice Chairman of the FSC is also appointed by the President of the Republic of Korea upon recommendation by the Minister of Finance and Economy.
FSC deliberates and makes resolutions concerning the following matters.
(a) Formulation of and amendment to regulations relevant to the supervision of financial institutions;
(b) Authorization or permission of establishment, merger, conversion, or transfer or takeover of business of financial institutions;
(c) Authorization and permission relevant to the operations of financial institutions;
(d) Important matters relevant to the examination of and sanction against financial institutions
(e) Important matters relevant to the administration, supervision, and surveillance of securities and futures market; and
(f) Other matters relevant to the authority vested in the FSC.
The Securities and Futures Commission (SFC) is separately established under the FSC to regulate and monitor companies in securities and futures industry.
The FSS is established (as a special corporation having no capital) in order to examine and supervise financial institutions under the directions of the FSC and SFC. The Chairman of the FSC concurrently holds the post of the Governor of FSS.
The FSS performs the following duties in accordance with the Act on the Establishment, etc. of Financial Supervisory Organizations (the Act).
-Examination of the business and asset status of the financial institutions
-Imposition of sanctions under the Act and other acts and subordinate statutes according to the findings as a result of the examinations
-Assistance in the duties of the FSS and the SFC; and
-Other duties which are entrusted to the FSS under the Act and other acts and subordinate statutes
The institutions which are subject to examination by the FSS are those falling under one of the following categories.
-Financial institutions established with the authorization under the Banking Act or the Long-Term Credit Bank Act
-Securities companies, securities finance corporations, and transfer agents established under the Securities and Exchange Act
-Asset management companies and investment counsel companies established under the Act on Business of Operating Indirect Investment and Assets
-Insurers established under the Insurance Business Act
-Merchant banks established under the Merchant Banks Act
-Mutual savings banks and the Federation of Saving Banks established under the Mutual Savings Banks Act
-Credit unions and the National Credit Union Federation established under the Credit Unions Act
-Trust companies established under the Trust Business Act
-Specialized credit financial companies and persons who engage concurrently in loan business established under the Specialized Credit Financial Business Act
-Futures dealer under the Futures Trading Act
-The credit business sector of the National Agricultural Cooperative Federation under the Agricultural Cooperatives Act
-The credit business sector of the National Federation of Fisheries Cooperatives under the Fisheries Cooperatives Act
-The institutions to be examined by the Financial Supervisory Service pursuant to the provisions of other Acts and subordinate statutes
As you can see above, the range of financial institutions monitored by FSS and FSC are all-encompassing, and, as such, the FSC and FSS play influential roles in shaping up the financial industry of Korea.
With the advent of the new Lee, Myung Bak administration in Korea last February 2008, one of the key regulatory structure changes taken place relate to the financial authority structure in Korea. Specifically, the formerly known as the Financial Supervisory Commission has been now renamed to the Financial Services Commission (the “FSC”), and such name change has come with more regulatory authority than ever before.
Prior to the Lee Administration, the main functions of the FSC were formulation of and amendment to regulations relevant to the supervision of financial institutions and issuing authorization and permits related to establishment and operation of the financial institutions. Now, adding to these powers of the FSC is formulation of and amendment to regulations relevant to the financial policies, which function previously belonged to the former Ministry of Finance and Economy (now known as the Ministry of Strategy and Finance).
So, the FSC now effectively controls both aspects of the financial policy and the financial supervision, and such consolidation of power clearly worry some people about going back to the old days of the government sector controlling the financial private sector. That is, after the foreign exchange crisis in the late 1990s, the authority relevant to the financial policy was given to the then Ministry of Finance and Economy (the “MOFE”) with the authority relevant to the financial supervision going to the then Financial Supervisory Commission and the Financial Supervisory Service (the “FSS”), to avoid abuse of the government’s power in managing the financial sector. But, some 10 years later, now with the FSC absorbing the rule-making authority concerning the financial policy, there are voices expressing concerns about the FSC wielding too much power in the finance industry.
To be sure, there are also people welcoming the change, mainly on the ground that the efficiency in overseeing the financial sector will improve. Specifically, the FSC will take care of the matters pertaining to the financial system, and the FSS will take care of the matters pertaining to examination of the financial institutions. Before the change, the overall structure of the financial authority was said to be loose as the MOFE, the FSC and the FSS took separate functions of overseeing the financial industry.
It should be noted that the entity that cannot be happy with all this change in the financial regulatory structure is the FSS. With the FSC having become a much wider financial authority, the FSS is worried that it will merely be reduced to conducting examination of the financial institutions under the directions of the FSC. (The FSC is part of Korean government under the Office of Prime Minister and consists of top bureaucrats while the FSS is under the directions of the FSC but is an organization independent of Korean government.)
As the first Chairman of the FSC, the Lee Administration appointed Jun, Kwang Woo, who was formerly chairman of Deloitte Korea. Mr. Jun, an international finance expert who has served in various posts both in the government and private sectors the past 25 years, is expected to ease regulations in efforts to bolster the competitiveness of the Korean finance industry; but, in such process, he would be certainly challenged by the tough task of effectively running his powerful agency without creating perceptions of wielding its power to an unnecessary extent.
How do you effectively assign loans or your rights to certain receivables under Korean laws?
Under the Civil Act of Korea (the “Civil Act”), any right to payment held by a party (the “Creditor”) can be assigned to a third party unless there is an agreement between the Creditor and the party who is obligated to make the payment (the “Debtor”) that prohibits assignment of the Creditor’s right. In the event, however, that the Creditor assigns the right to payment to a third party in violation of the agreement for non-assignment, such assignment would still be valid if the assignee was not aware of the non-assignment agreement and also was not grossly negligent when receiving the assignment.
Similarly, if there is an agreement between the Creditor and the Debtor requiring the Creditor to obtain a prior consent of the Debtor for assignment, and the Creditor has made an assignment without obtaining the required consent, the relevant assignment would not be rendered void, provided that the assignee was not aware of the agreement for requiring the prior consent and also was not grossly negligent when receiving the assignment.
As for the method of making an assignment by the Creditor, Korean laws do not prescribe any specific method or means. However, in order for an assignment by the Creditor to be effective as to the Debtor and any third party, it would be required to follow certain method prescribed by the Civil Act.
(i) For assignment to have effect as to the Debtor: The Creditor is required to send a notice to the Debtor for assignment of the Creditor’s right to payment, or obtain from the Debtor a consent to the relevant assignment.
(ii) For assignment to have effect as to any third party: The above notice by the Creditor or the consent by the Debtor must have a fixed-date stamp affixed thereon. This could be done by sending the Creditor’s notice or obtaining the Debtor’s consent by way of a contents-certified mail (i.e., a Korean post office certifying as to contents of a mail and placing a certification date thereon) or receiving the Debtor’s consent that has been notarized.
For any assignment of loans or certain receivables occurred in Korea, it would be advisable to retain advice of a qualified Korean law firm or Korean attorney to ensure that the intended assignment has met the requirements under Korean law.