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.