Tapestry Alert: South Korea - Exchange controls clarification on trading employee shares

Tapestry Newsletters

18 July 2023

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.


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


Lewis Dulley

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