If You Hide Stock Acquisition Through Warrant Exercise, You Face Fines... What Are Common Cases of Frequent Shareholding Disclosure Violations?

[Asia Economy Reporter Ji-hwan Park] The Financial Supervisory Service (FSS) recently provided guidance on the types of shareholding disclosure violations that occur frequently or are easily overlooked by disclosure obligors on the 8th. Shareholding disclosure refers to disclosures that provide investors with information regarding potential changes in control of listed companies.

Violation of Large Shareholder Reporting Due to OTC Stock Transfer Agreement

First, this applies when a large shareholder of listed company stocks enters into an over-the-counter (OTC) stock transfer agreement involving the transfer of shares (1% or more of the total issued shares).

Since this is a major contract that could lead to a change in control in the future, the obligation to report large shareholding (or changes) arises on the 'contract signing date' even before the actual transfer of shares. Therefore, related information must be disclosed to investors within the reporting deadline through shareholding disclosure.

Violation of Large Shareholder Reporting Due to CB Call Option Agreement

When a call option agreement is entered into for convertible bonds (CB) amounting to 1% or more of the total issued shares, it is considered a major contract that could lead to a change in control in the future. CB holders have the obligation to report large shareholding (or changes) on the 'contract signing date' (excluding simple investment purposes).

Those who acquire call options through the contract must report new or changed large shareholding obligations on the contract signing date, and all reports must be submitted within the reporting deadline.

Violation of Ownership Reporting Due to Misunderstanding of Reporting Exemption

Mr. Park, an executive of listed company A, exercised conversion rights on convertible bonds of company A that he held and acquired common shares but did not report the ownership (or changes). Mr. Park violated the ownership reporting obligation, mistakenly believing that he was exempt from reporting.

The FSS emphasized that even if acquiring shares through exercising rights on stock-related bonds such as bonds with warrants (BW) or CBs held is exempt from large shareholding (or changes) reporting for cases like bonus issues, if it involves stock dividends, acquisition of free new shares, stock splits, or consolidations, ownership reporting obligations arise. In such cases, the change report must be completed by the 10th of the month following the month in which the change occurred.

Violation of Large Shareholder Reporting Due to Collateral Agreement

Violation of large shareholder reporting due to collateral agreements is also a major type of shareholding disclosure violation. Large shareholders have the obligation to report large shareholding (or changes) when a collateral agreement related to the shares they hold is entered into or changed. However, investments for simple investment purposes are excluded.

Even if an existing collateral agreement previously reported is renewed under the same conditions after the contract period expires, it is considered a significant matter due to the change in contract period and must be reported as a large shareholding (or changes) report.

Omission of Joint Reporting of Members in Large Shareholding Reporting by Civil Law Associations

In the case of civil law associations, all members must be jointly reported as co-holders. The most common mistake is reporting only under the association’s name, resulting in omission.

When the representative member reports as the representative reporter, other members must be jointly reported as special related parties. If the association reports as the representative reporter, all members must also be jointly reported as special related parties to ensure no members are omitted.

Calculation Errors in Shareholding Ratios and Lack of Supporting Documents

Additionally, the FSS emphasized that when reporting large shareholding and ownership, the shareholding ratio should be based on the total issued shares at the time the reporting obligation arises, not at the time of reporting, to avoid calculation errors. The total issued shares include treasury shares, voting preferred shares, and non-voting preferred shares whose voting rights have been restored.

Furthermore, it was advised not to attach supporting documents for reporting reasons incompletely or selectively.

An FSS official stated, "We provide a practical guidebook on corporate disclosures that clearly summarizes the shareholding disclosure system and major Q&A items," adding, "It is also available on the DART electronic disclosure system website."