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According to The Korea Economic Daily Global Edition,

Executives and major shareholders of South Korea’s listed companies will be obligated to disclose their share transaction plans at least 30 days in advance amid concerns that the move could hurt free market principles and increase market volatility.

The Financial Services Commission (FSC) said on Monday it will adopt a pre-disclosure system to prevent unfair insider trading and protect minor shareholders from heavy losses when volume trading occurs without their knowledge.

The financial regulator said it aims to get the new measure enacted at the National Assembly by year-end.

“We know there’s great market interest in this matter. We’ll soon submit our proposal on an amended Capital Market Act to the National Assembly,” the FSC said.

Any executive or a major shareholder who owns more than 10% of stocks with voting rights or those who exercise important management rights such as executive appointments or dismissals would be subject to the new regulations.

Non-major shareholders will also be required to make public their transaction plans if they plan to buy or sell 1% or more of total outstanding shares, or if the value of their transactions exceeds 5 billion won ($3.6 million).

The information they must disclose includes the purpose and timing of the trading, volumes and expected prices of shares.

Under the current law, listed firms’ executives and major shareholders are required to make public their massive share sales and purchases after transactions are completed.

The FSC said on Monday there would be some exceptions to the new mandatory disclosure rules.

If any insider information is judged insignificant or non-disclosure is expected to have little market impact, executives and major shareholders will not be required to make their plans public beforehand.

Other exceptions include cases where it is difficult to disclose information in advance due to the nature of transactions, such as mergers and acquisitions (M&A), inheritance, stock dividends and trading by state pension funds, it said.

If the disclosure of a share transaction plan is expected to lead to significant market volatility and cause heavy losses to those shareholders involved, they can change or withdraw their share transaction plans.

Insider trading, a transaction of a company's securities by individuals with access to confidential or material non-public information about the company, has often been criticized as taking advantage of such privileged access is considered a breach of the individual's fiduciary duty.

Public calls for strengthened rules against unfair insider trading have been growing since Alex Young-joon Ryu, a co-CEO nominee of Kakao Corp., stepped down in January as his earlier disposal of $39 million worth of shares in Kakao’s fintech unit Kakao Pay Corp. met with strong backlash.

About a month after Kakao Pay’s market debut, Ryu and seven other executives of the company exercised their stock options and dumped a combined 440,000 shares in after-hours trade. The block sale caused the company's shares to fall significantly, inviting harsh criticism from its labor union and minority shareholders and raising a management ethics controversy.

In March, the FSC banned CEOs and executives from selling their shares for at least six months after exercising stock options when the company goes public.

According to the Securities and Futures Commission, among the 274 reported cases of unfair trade over the past five years, transactions taking advantage of undisclosed information accounted for 43.4% or 119 cases.

The Korea Listed Companies Association, however, said the new law the FSC intends to introduce could be abused, severely hurting large-scale share transactions.

“If the purpose of the new rules is to prevent unfair and illegal insider trading, reporting transaction plans only to the Korea Exchange or financial regulators in advance will be sufficient, just like the US and Japan,” said an association official.

Investment banking officials said the expected increase in market volatility as a result of pre-disclosure would discourage investors from participating in large-scale block deals.

“A pre-disclosure might not protect minor shareholders as much as expected. Potential bad news could trigger short selling, which is as bad or even worse for small investors as they have nothing to do to prevent a sharp share decline,” said an industry official.

Source Text

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Write to Dong-Hun Lee at leedh@hankyung.com
In-Soo Nam edited this article




Source: The Korea Economic Daily Global Edition (Sept. 12, 2022)