Korea to require pre-disclosure of major shareholder stake sales

South Korea is set to require pre-disclosures of major shareholders’ listed company stake sales in an aim to prevent tumbles in stock prices.

A subcommittee of the National Assembly’s policy committee on Tuesday passed a revision to the Capital Market Act that compels shareholders with stakes of 10% or more to report their plans for sales of more than 1% of issued stocks before their disposals within 30-90 days to the Korea Exchange and the Securities and Futures Commission.

Currently, the country mandates investors with a stake of 5% or more to file a report within five days of buying or selling 1% or more.

“Institutional measures are needed to avert investor losses as massive selling of listed companies’ stocks (by major shareholders) confuses markets and damages investors,” said Lee Yongwoo, a lawmaker of the main opposition Democratic Party, who proposed the bill.

“We looked up US cases that require major shareholders to submit reports and pre-trade plans,” said Lee, a former co-CEO of South Korea’s top internet-only lender KakaoBank Corp.

The revision came as some stocks tumbled on massive selling by Société Générale S.A., which was suspected of connection with its clients’ margin calls triggered by the stake sale of a company's top shareholder.

SIDE EFFECTS?

Lawmakers of the ruling People Power Party and opposition parties agreed to require major shareholders to file pre-disclosures for both buying and selling. Pension funds are exempted from the tougher mandate.

The Financial Services Commission asked to include transactions of certain sizes in the tougher rule to regulate large listed companies, in which major shareholders have a stake of less than 10%.

The revised bill will be presented at the National Policy Committee later this month and voted on at the Legislation & Judiciary Committee and a plenary session of the National Assembly.

The bill, however, did not reflect concerns over side effects, which could keep major shareholders from quickly dealing with activist funds to protect management rights, for example, some experts said.

“That could violate the property rights of major shareholders as it is likely to force them to bear the risk of stock price volatility during the restriction period while intensifying the risk of a sharp drop in stock prices as they can sell shares only in a permitted period,” the Korea Listed Companies Association said to lawmakers.

Write to Bum-Jin Chun at forward@hankyung.com
 
Jongwoo Cheon edited this article.