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18 July 2023
Tapestry
Alert: South Korea
Exchange
controls clarification on trading employee shares
Dear
Client
South Korea’s Financial
Supervisory Service (FSS) has recently clarified the procedure to
be followed by Korean residents when trading shares of a foreign
parent company acquired under an employee share plan.
Background
Existing foreign exchange rules in South Korea require that “when an individual resident
desires to trade foreign listed shares, it shall carry out such
trading via a Korean securities company”. It was not
clear (and there was no guidance issued on the matter) whether this
rule applied to a Korean resident employee trading shares of a
listed foreign company when the shares were acquired under an
employee share plan.
The recent announcement by the FSS confirms that the rules do apply to
shares acquired under an employee share plan of a foreign listed
company when the shares are traded (acquired or sold) by a Korean
resident.
What does
the announcement mean?
The announcement is a clarification of existing rules, not a new
requirement. The regulations may have already been considered and
complied with by your local team in South Korea, however this
should be checked.
The requirement that trading must be made “via a Korean securities
company” means that when a participant wishes to
transact in (i.e. acquire or dispose of) shares under a share plan
of a foreign company, the participant must comply with the
following:
- they must open a
foreign securities investor account with a Korean securities
company;
- the relevant shares
must be deposited with a foreign depository which is linked to
the Korea Securities Depository (KSD); and
- on a sale, a
disposition order must be made through the Korean securities
company.
This means that participants will
likely need to open, and make their trade instructions via, a
Korean securities company, if this arrangement is not already in
place. It may be possible for an administrator to act as the
participant’s agent to continue to take dealing instructions, but
this will be subject to authorisation from the participant and
agreement with the Korean securities company.
If an employee receives sale proceeds from selling their shares
under a share plan of a foreign company without complying with the
above requirements, they will breach the regulations (thankfully,
however, there are no mandatory repatriation requirements and
off-shore dividend reinvestment is still permitted).
To our local counsel’s knowledge, major foreign share depositories
(which might be used by plan administrators) are likely already to
be linked to the KSD, so the second bullet point above may already
be met, however this should be checked with a company’s plan
administrator. If the share depository account is not linked to the
KSD, the relevant shares must also now be transferred to a
depository which is linked to the KSD. We understand that
depository accounts with Citibank, J.P. Morgan, HSBC, State Street
Bank and BNY Mellon are linked to the KSD: see here.
Timing and
enforcement
The announcement does not state an effective date, but as it was
made in June, it is expected that enforcement of the clarification
will likely begin this month (July).
Penalties for non-compliance apply to individuals when a trading
amount exceeds USD10,000, in which case a penalty charge of 2% of
the trading amount will be charged, with a maximum penalty charge
of KRW50 million (approx. GBP30,000).
Tapestry
comment
Whilst this
announcement appears to clarify an existing rule, we recommend that
companies take steps to check that the regulations are being met locally,
as it seems likely that this will not be the case.
The obligations
must be satisfied by individual participants, not the company or
the local employer, however it would be sensible for companies to
check whether their local teams are aware of these requirements and
are able to help participants set up a foreign securities investor
account with a Korean securities company. Alternatively, as noted
above, we understand that it may be possible for companies to
continue to use their existing administrator to act as the
participant’s agent to deliver instructions to the Korean
securities company - this approach may be preferable to ease
administration for Korean resident participants, however this will
need to be discussed with your administrator and advisers to ensure
the agency approach is properly incorporated into the operation of
the plan.
Companies should
also check whether the share depository accounts being used by
their administrator are linked to the KSD or not. Where a KSD
linked account is unavailable or cannot be facilitated, companies
are still permitted to operate phantom awards or cash settlement as
an alternative structure, or participants could use their own local
securities company entirely.
We understand that
the press in Korea has reported that local securities companies
have advised Korean residents of the need to comply with the
guidelines. Companies should consider using local plan
communications to alert employees of the obligation to comply with
the trading rules.
Thank you
to our counsel in South Korea, Shin & Kim LLC, for their
continued support with these developments.
Sonia,
Sally, Sharon and Lewis
   
Sonia Taylor Sally Blanchflower Sharon Thwaites Lewis Dulley
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