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Disclosure of Significant Event

Reporting of Large Share Ownership

Basics of Five Percent Rule

Under the regulation on the disclosure of large equity ownership in listed companies commonly referred to as the “five percent rule,” a shareholder acquiring a class of equity securities of a listed company must file a report with the FSC/FSS and the Korea Exchange within five days after the acquisition when:

  • (a) The shareholder acquires five percent or more of the listed company’s total equity securities issued (the “five percent shareholder”);
  • (b) The five percent shareholder raises or reduces its equity ownership by one percentage point or more; or
  • (c) The five percent shareholder alters the purpose of its equity ownership or enters into or amends an agreement that can materially affect its equity ownership in the listed company.

The five percent rule is intended to ensure fair and orderly dissemination of information to investors and help them make informed decisions. By facilitating effective disclosure of material information pertaining to large equity acquisitions and dispositions to all market participants, the five percent rule also contributes to more transparent and orderly market competition for the management control of publicly held companies.

Three Types of Five Percent Disclosure

The five percent rule provides for three types of disclosure in respect of the five percent rule: initial acquisition report, subsequent change report, and material change report.

  • (a) Initial Acquisition Report (IAR): When the equity ownership of a shareholder and persons specially related to the shareholder (“specially related persons”) exceeds five percent for the first time, an IAR must be filed with the FSC/FSS and the Korea Exchange within five days after the date of the acquisition.
  • (b) Subsequent Change Report (SCR): When a five percent shareholder raises or reduces its equity ownership by one percentage point or more, an SCR must be filed with the FSC/FSS and the Korea Exchange within five days immediately after the date of the change. An SCR must also be filed when the shareholder’s equity ownership falls by at least one percentage point from 5.5 percent to 4.5 percent or lower; no SCR is necessary when equity ownership declines by 0.6 percentage points (less than one percentage point) to 4.9 percent. When a disclosure-triggering event occurs during the five-day disclosure period for an earlier disclosure-triggering event, both events must be reported together by the end of the earlier five-day disclosure period.
  • (c) Material Change Report (MCR): An MCR must be filed when:
    • A five percent shareholder amends the purpose of its equity ownership from passive investment to influencing company management (or vice versa);
    • A five percent shareholder whose purpose of equity ownership is to influence company management enters into or amends an agreement that can materially affect the shareholder’s equity ownership in the listed company; such an agreement may include a contractual relationship or obligation to place the shareholder’s equity securities under the management of a trust or to employ the equity securities for use as collateral or for securities lending or borrowing; the determination of whether an agreement or any change therein constitutes a disclosure-triggering event is to be made on the basis of the likelihood of a material change to the shareholder’s equity ownership; and
    • A five percent shareholder whose purpose of equity ownership is to influence company management amends the status of its equity ownership from legal ownership to beneficial ownership (or vice versa).

Securities Covered under the Five Percent Rule

The following classes of equity and equity-convertible securities are subject to disclosure under the five percent rule:

  • (a) Stocks including common voting stock, preferred voting stock, preferred nonvoting stock that becomes voting in the event of no dividend, and convertible preferred stock;
  • (b) Certificates representing rights/options to acquire new shares, including preemptive rights certificates and warrants;
  • (c) Convertible bonds;
  • (d) Bonds with warrants;
  • (e) Exchangeable bonds with equity conversion rights/options to any of the securities listed in subparagraphs (a) through (d); and
  • (f) Structured derivatives with any of the securities listed in subparagraphs (a) through (e) as the underlying assets.

When issued by an issuer other than the listed company, the following classes of securities are subject to disclosure under the five percent rule:

  • (g) Depositary receipts linked to any of the securities listed in subparagraphs (a) through (f);
  • (h) Exchangeable bonds with equity conversion rights/options to any of the securities listed in subparagraphs (a) through (g); and
  • (i) Structured derivatives with any of the securities listed in subparagraphs (a) through (h) as the underlying assets.

Persons Covered under the Five Percent Rule

When the aggregate equity ownership of a shareholder and its specially related personsㅡdefined as persons related to the shareholder (“related persons”) and/or persons that jointly hold the issuer’s equity securities with the shareholder (“joint holders”)ㅡexceeds five percent, both the shareholder and the specially related persons must file a disclosure under the five percent rule. Where both the shareholder and the specially related persons must file a report, the shareholder with the largest equity ownership may file a single joint report on behalf of the group.

The shareholder and the specially related persons filing a disclosure under the five percent rule must comply with additional disclosure requirements that are specifically applicable to corporate insiders such as directors, officers, and major shareholders.

Specially Related Person

Specially related person is a collective designation for the related person and the joint holder of a shareholder. Both related persons and joint holders are specially related persons of a shareholder.

Related Person

Where the shareholder is a natural person, the related person designation extends to the following persons:

  • (a) Spouse (including a person in a de facto marriage);
  • (b) Relatives within six degrees of kinship;
  • (c) Relatives by marriage within four degrees of kinship;
  • (d) Biological parents of an adopted person
  • (e) A direct biological descendant (of the shareholder) adopted by non-biological parents, and the descendant's spouse and children;
  • (f) Biological mother of a child born outside the shareholder's lawful marriage;
  • (g) Any person whose livelihood depends on the financial assistance of the shareholder or who cohabits with the shareholder in a dependent relationship;
  • (h) A company (and its directors and officers) at least 30 percent owned or effectively controlled by the shareholderㅡalone or together with any of the persons listed in subparagraphs (a) through (g); and
  • (i) A company or an entity (and its directors and officers) effectively controlled by the shareholderㅡalone or together with any of the persons listed in subparagraphs (a) through (h).

Where the shareholder is a legal entity, the related person designation extends to the following persons and entities:

  • (a) Shareholder's directors and officers;
  • (b) Shareholder's affiliate (as recognized under the Monopoly Regulation and Fair Trade Act) and the affiliate's directors and officers;
  • (c) A natural personㅡincluding any of the related persons listed in subparagraphs (a) and (b)ㅡthat holds at least 30 percent of the shareholder or effectively controls it; and
  • (d) A company or a business groupㅡincluding its directors and officersㅡthat, alone or together with any of the related persons listed in subparagraphs (a) through (c), holds at least 30 percent of the shareholder or effectively controls it.

Where a related person is able to verify it holds less than 1,000 shares and it is not a joint holder, the related person's equity securities are excluded from the equity ownership calculation.

Joint Holder

A joint holder is a designation given to a shareholder that engages in any of the following activities under a mutual consent or under an agreement with another shareholder:

  • (a) Acquiring or disposing of equity securities jointly with another shareholder;
  • (b) Acquiring equity securities alone or jointly with another shareholder and transferring the acquired equity securities to another shareholder; or
  • (c) Exercising voting rights (including the right to dictate voting) jointly with another shareholder.
Legal and Beneficial Ownership

The five percent rule incorporates the concept of "securities held" to broadly encapsulate not only a shareholder's legally and beneficially owned equity securities, but also the shareholder's legally and beneficially owned equity conversion rights/options that may be exercised to acquire equity securities or wield voting powers as provided below:

  • (a) A person pays for and receives the issuer's equity securities using the name of another person to conduct the purchase; the duty to file a report under the five percent rule falls on the person that beneficially owns the equity securities irrespective of whether or not the purchase has been made under the name of another person;
  • (b) A person obtains a right to compel another person to deliver equity securities under the provisions of law involved or the terms and conditions of an agreement;
  • (c) A person obtains a right to acquire or dispose of equity securities or exercise voting rights under the provisions of law involved or under the terms and conditions of an agreement such as a contract to place assets under a trust, a collateral agreement, or a discretionary asset management contract;
  • (d) A person enters into a pre-agreement to acquire a listed company's equity securities, thus attaining the position of a potential shareholder of the listed company;
  • (e) A person acquires call options that may be exercised to acquire a listed company's equity securities, thus attaining the position of a potential shareholder of the listed company; and
  • (f) A person receives stock options that may be exercised to acquire a listed company's equity securities, thus attaining the position of a potential shareholder of the listed company.

Disclosure Period

A five percent shareholder must file a report with the FSS and Korea Exchange within five days following the date of a report-triggering event. When determining the number of days during which a disclosure must be filed, the day of the disclosure-triggering event, national holidays, Saturdays and Sundays, and the May 1 Labor Day are excluded. Article 154 of the Enforcement Decree of FISCMA provides exceptions to the five-day disclosure period when the purpose of the equity ownership is passive investment, or the disclosure period for a subsequent change report extends to the tenth day after the end of the month during which the report-triggering event occurred. The disclosure period for an initial acquisition report is five days after the date of the acquisition.

Filing a Joint Report

Where a shareholder and its specially related persons hold equity securities, the shareholder with the largest equity ownership may file a joint report as the group's reporting shareholder with the consent of each group member.

  • (a) For a joint report, each group member must deliver a power of attorney to the group's reporting shareholder for submission (duplicates of the letters) together with the joint report.
  • (b) The group's reporting shareholder must disclose any report-trigging event after a joint report has been filed. In the event the group designates a new reporting shareholder, the new reporting shareholder must file a joint report (together with letters of the power of attorney from the group members).

Cooling-Off Period for New Share Acquisition

The five percent rule provides a cooling-off period during which a five percent shareholder can neither acquire additional equity interests nor exercise the voting rights. The cooling-off period takes effect from the day after the date a disclosure-triggering event occurs to the fifth day after the date the five percent shareholder files a report.

  • (a) A five-day cooling-off period takes effect the day after a shareholder files an IAR for acquiring more than five percent for the purpose of influencing company management. Similarly, a five-day cooling-off period takes effect the day after a five percent shareholder files an MCR for changing the purpose of the equity ownership from passive investment to influencing company management.
  • (b) No cooling-off period takes effect for a shareholder that files an SCR after filing an IAR with the intent to influence company management.

The cooling-off period commences the day after the date a disclosure-triggering event occurs and ends on the fifth day after the date a report is filed.

  • (a) The day the shareholder files a report is excluded from the cooling-off period. National holidays, Saturdays, Sundays, and the May 1 Labor Day are excluded from the cooling-off period.
  • (b) Failure to comply with the cooling-off period requirements may result in the suspension of the voting rights of the equity securities and an order for the disposition of the non-complying equity securities.