The regulator. Regulator. Size limits. Trading record. Working capital PLC

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1 Capital Markets 2010 South Korea South Korea Bo-Yong Ahn and Jihay Ellie Kwack, Kim & Chang EQUITY CAPITAL MARKETS: GENERAL 1. Please give a brief overview of the equity market(s) in your jurisdiction and initial public offering (IPO) activity generally. What were the large deals over the past year? Have there been many listings of overseas companies on your market(s)? 2. Please describe the main equity capital market(s) and summarise the following in relation to each market (distinguishing where appropriate the requirements for overseas companies seeking a primary listing in your jurisdiction): The regulator. In 2009, South Korean (Korean) equity market issues for IPOs totalled over KRW3.3 trillion (about US$2.75 billion): KRW2.1 trillion (about US$1.75 billion) was issued on the KOSPI Market of the Korea Exchange (KRX) (a total of 13 listings, excluding two issuers which were transferred from the KOSDAQ Market of the KRX). This is an increase of 545.7% compared to the KRW333.6 billion (about US$280 million) issued in KRW1.2 trillion (about US$1 billion) was issued on the KOSDAQ Market of the KRX (a total of 53 listings, excluding two issuers which were re-listed). This is an increase of 39.5% compared to the KRW473.3 billion (about US$0.39 billion) issued in The largest IPOs on the KOSPI Market in 2009 are as follows: Jinro (liquor manufacturer), at KRW590.4 billion (about US$490 million). SK C&C (provider of solutions and services provider for mobile communication service providers), at KRW540 billion (about US$450 million). The largest IPOs on the KOSDAQ Market in 2009 are as follows: Dongkuk Structures &Construction (wind tower manufacturer), at KRW251.4 billion (about US$200 million). WeMade Entertainment (online game developer) at KRW130.2 billion (about US$100 million). Listings by overseas companies in Korea grew in 2009: One Chinese company was listed on the KOSPI Market (China Ocean Resources offering of KRW53.3 billion (about US$44.1 million)). A total of four Chinese companies were listed on the KOS- DAQ Market, the largest of which was by the China Engine Group (KRW60 billion (about US$50 million)). There was also one listing by a Japanese company on the KOSDAQ Market. Any minimum size requirement. Any minimum trading record required. Any working capital requirements. Any minimum numbers of shares in public hands. Number of companies traded. Annual cost of being listed. The main equity capital market is the KRX which is the only securities exchange in Korea. The KRX has two markets: the KOSPI Market and the KOSDAQ Market. Regulator The regulator is the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) (see box, The regulatory authority). Size limits There is no minimum or maximum size for an equity offering. The minimum size for listing on the KRX is one million shares. Trading record At least three years of operating history is required. However, if the issuer was subject to a merger or a split-off, the predecessor s operating history before such event may be taken into account. Working capital There is no working capital requirement as such. However, the net equity capital of the issuer must be at least KRW10 billion (about US$8.3 million), or the market capitalisation must be at least KRW20 billion (about US$16.7 million) for a KOSPI Market listing or KRW30 billion (about US$25 million) for a KOSDAQ Market listing. Shares in public hands There must be at least 1,000 minority shareholders (that is, shareholders who each hold less than 1% of the total shares and are not affiliated with the largest shareholder) who in total hold 25% or more of the total shares. If 25% or more of the total shares (or 10% or more of the total shares, if this number satisfies a sliding scale requirement based CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

2 South Korea Capital Markets 2010 on net equity or market capitalisation) have been publicly offered, the requirement that minority shareholders must hold 25% or more of the total shares no longer applies. Number of companies traded There are about 770 companies trading on the KOSPI Market of the KRX, and about 1,021 companies on the KOSDAQ Market of the KRX. Annual cost Annual fees for a company listed on the KOSPI Market are determined on a sliding scale according to the number of shares or depositary receipts (DRs) listed. For example, the annual fee is fixed at KRW350,000 (about US$292) for up to 300,000 shares or DRs listed. The minimum annual fee is KRW1 million (about US$833) for over two million shares or DRs listed. There are two sets of annual fees for the KOSDAQ Market, one for DRs and one for other securities: Fees for DRs are determined based on the number of DRs listed, with a minimum of KRW175,000 (about US$146) (KRW500,000 (about US$417), if the number of DRs is at least two million). Fees for other securities are calculated based on the market capitalisation on the last trading day of the previous calendar year, with a minimum of KRW5,500 (about US$4.6) (KRW9,195,000 (about US$7,700), if the market capitalisation is KRW1 trillion (about US$833 million)). Preparation of the IPO, including appointment of a lead manager. Carrying out due diligence. Application to the KRX for a preliminary eligibility review. KRX review of listing eligibility and notification of review result. Preparation and filing of securities registration statement and prospectus. Marketing the IPO and bookbuilding (known as demand forecasting (see Question 15)). Pricing. Subscription and closing. Final application to the KRX for listing. Listing and trading. The procedure is largely similar for an overseas company, except that the KRX regulations require an overseas company wishing to list its shares or DRs on the KRX to consult with the KRX in advance before filing the application for preliminary eligibility review. As of the end of 2009, only two out of ten overseas companies listed on the KRX had listed DRs as opposed to shares, and the remaining eight overseas companies had listed their shares on the KRX. 5. Briefly outline the role of advisers commonly used for an IPO. IPOs ON THE MAIN EQUITY CAPITAL MARKET(S) 3. What are the main ways of structuring an IPO? An IPO is typically structured as an offer of new shares (raising cash for the issuer), possibly including an offer of existing shares (enabling major shareholders to monetise part of their shareholding). This is usually achieved by placing the shares with institutional investors as well as retail investors. Most IPOs are conducted as domestic offerings with a listing on the KRX, whether on the KOSPI Market or the KOSDAQ Market. Certain IPOs are conducted as dual listings, that involve simultaneous but separate offerings to domestic and international investors, with a listing on the KRX and on a foreign stock exchange at the same time. Certain IPOs are structured as a single listing on the KRX but offer separate tranches of stock to domestic and international investors (for example, offerings under Rule 144 or Regulation S of the US Securities Act). Offerings to international investors are mostly packaged as DRs rather than shares of the Korean issuer. 4. Outline the procedure for a company applying for a primary listing of its shares in your jurisdiction. Is the procedure different for an overseas company? Is an overseas company likely to seek a listing for shares or depositary receipts? The principal steps in applying for a primary listing are generally as follows: The following are the advisers generally involved in an IPO. Financial investment companies Lead manager. A company that intends to conduct an IPO is required to enter into a lead manager agreement with a financial investment company. The lead manager advises the issuer on the structure of the offering and various related issues. The lead manager often plays the role of a financial adviser to the issuer when there is no separate financial adviser. The lead manager usually becomes one of the underwriters. The lead manager also often prepares the prospectus. Underwriter. Underwriters undertake to purchase the shares to be offered. Global co-ordinator or placing agent. When a foreign tranche is offered overseas or in case of a dual listing, global investment banks become involved to market and co-ordinate the overseas offering. Financial adviser. The issuer sometimes retains a separate financial adviser to advise on the structure and timing of the offering, the capital structure of the company and corporate governance issues. Legal counsel Issuer s counsel. Issuer s counsel advises the issuer on various legal matters relating to the offering, conducts legal due diligence and assists the issuer in preparing the securities registration statement and prospectus and negotiating the underwriting documentation. 232 CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

3 Capital Markets 2010 South Korea Underwriters counsel. Underwriters counsel advises the lead managers and underwriters on various legal matters relating to the offering, conducts legal due diligence, reviews the securities registration statement and prospectus, and assists the underwriters in negotiating the underwriting documentation. Accounting firms The issuer must submit the recent three years audit reports issued by its own accountants. Unless the issuer is already listed on the KRX or on a designated foreign stock exchange, a separate auditor is appointed by the Securities Futures Commission (a committee under the FSC) to issue the audit report on the most recent year, half-year or quarter s financials. Any overseas offering in the amount of KRW1 billion or greater requires filing of a securities statement with the FSC, unless certain appropriate measures are taken to prevent the offered shares from flowing back into Korean investors hands. In connection with an overseas offering, a prospectus in English is also prepared. 8. Is it possible to extend an offer to certain types of persons within your jurisdiction without preparing a full prospectus (for example, to sophisticated investors, employees or a small group)? If so, please set out suggested wording that would be used to restrict the offering. 6. What are the principal documents produced in an IPO? The principal documents produced in an IPO are: Prospectus. Securities registration statement. Issuer s board resolutions. Mandatory public disclosures such as result of public offering. Lead manager agreement and underwriting agreement. Auditor s reports and comfort letters. Legal opinions. Lock-up agreement. Listing application. 7. Please summarise the requirements for a prospectus (or other main offering document). Any domestic offering in the amount of KRW1 billion (about US$833,000) or greater to 50 or more investors within a six month period requires a filing of a securities registration statement with the FSC. Certain professional investors or those affiliated with the largest shareholder are not counted towards the 50 investor threshold. If the shares of the same issuer have been publicly offered previously, the securities registration statement is always required for any primary offering, unless the offered shares are locked up for one year in deposit with the Korea Securities Depository (KSD). No subscription of the offered securities is binding until the securities registration statement is finally approved and the waiting period for its effectiveness lapses according to the type of offering (in an IPO, 15 days from the filing of the securities registration statement). An equity offering can be structured to avoid the registration statement and prospectus filing requirement. The exemptions include: Any offering the size of which is smaller than KRW1 billion (about US$833,000). In the case of an issuer that has never publicly offered shares, any offering to exempt categories of persons, including: certain professional investors; largest shareholder; officers or the employee stock ownership programme of the issuer; officers of the issuer s affiliates. Any offering in the secondary market to the above exempt categories of persons. Any offering with a one year lock-up of the offered shares in deposit with the KSD. In an overseas offering, the following language is typically included in the prospectus to put the investors on notice that the offering is exempt from the filing requirement: No securities registration statement has been filed with the FSC. The offered securities may not be offered, sold or otherwise transferred to any Korean resident within one year from the issuance date except as permitted under Korean laws and regulations. However, the above language in itself does not satisfy the exemption requirements and additional measures must be taken, such as obtaining a written acknowledgement of such transfer restriction from the investors, and prohibiting the entry of any transfer in the issuer s shareholder registry in violation of the restriction. Generally, the securities registration statement is filed in an equity offering by a listed company or for an IPO, because it is difficult to satisfy these exemption requirements in such a case unless a one year lock-up is implemented. When a securities registration statement is required, marketing is only allowed using the preliminary or final prospectus filed with the FSC, or shorter materials called a simplified prospectus that meet certain requirements. The content of the preliminary or final prospectus is almost identical to the securities registration statement. 9. Are there any exemptions from the requirements for a prospectus (or other main offering document)? See Question 8. CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

4 South Korea Capital Markets Please outline the contents of the prospectus (or other main offering document). The securities registration statement must be prepared using the forms prescribed by the regulators. The required contents includes: Offering related information. This includes: general information on offering timeline and procedures; rights attached to the shares; risk factors associated with the investment; underwriters opinion on the offering; use of proceeds. Issuer related information. This includes: business information; financial information; auditor s audit opinion; board of directors; affiliates and transactions with affiliates. Issuer s directors, including de-facto directors who have the power to direct the management of the issuer. Underwriters. Accountants, credit rating agencies or lawyers who confirmed in writing the truthfulness or accuracy of the content. Anyone who consented to his evaluation, analysis or opinion being stated in the securities registration statement. Those who prepared and distributed the prospectus. Owner of the shares, in the case of an offering in the secondary market. Buyers of the offered shares who suffered damages due to a material inaccuracy or omission in the securities registration statement or prospectus may claim monetary compensation from those liable for the content. The liability is released if it is proved that the damages suffered by the buyers did not result from the material inaccuracy or omission in the securities registration statement or the prospectus. While forward-looking statements are exempt from liability under certain conditions, this exemption is not available in an IPO. 13. Briefly explain the ways used to market an IPO. In practice, the prospectus is prepared to be almost identical to the securities registration statement. Any shorter marketing materials must satisfy the requirements for a simplified prospectus that includes the information on the FSC s list of designated items and a statement that refers the investors to the preliminary or final prospectus for more details. 11. How is the prospectus (or other main offering document) prepared and verified? In a domestic offering, the securities registration statement and prospectus are often prepared by the lead manager with input from other parties. However, there are many instances where the securities registration statement and prospectus are prepared by the issuer s legal counsel, especially when overseas offering is involved. The securities registration statement and the preliminary prospectus are usually filed with the FSC at the same time. When the registration statement is approved by the FSC, the final prospectus is filed reflecting all changes. If the securities registration statement or prospectus is amended for material inaccuracy or omission according to the FSC s comments or otherwise, the waiting period for the effectiveness of the securities registration statement restarts, from the filing of the amendment to cure the defect. 12. Who is responsible for the content of the prospectus (or other main offering document) and any liability arising from its contents? Underwriters contact institutional investors through telecommunication channels or meetings. If individuals are targeted, the underwriters retail sales team contacts their customers or may resort to public advertisements. The marketing materials permitted to be used are limited to the preliminary or final prospectus, or any shorter materials that meet certain requirements (see Question 10). 14. Describe any potential liability from publishing research reports by connected brokers and ways used to avoid such liability. Financial investment companies that have a stake in the subject of the research report are restricted from publishing research reports as follows: Lead manager or co-arranger of an IPO until after 40 days following the date of listing. Market maker until the end of the market making period. Financial investment company which holds 5% or more of the shares in the subject company. Financial investment company which is involved in M&A advisory business for 5% or more shares in the subject company. If the publishing is not prohibited, a financial investment company must disclose its interest in the subject company, including ownership of 1% or greater of shares or any affiliate relationship. Breach of the above restrictions on publishing research reports may result in administrative sanctions. The following persons have statutory liability for the content of the securities registration statement or the prospectus: If the content of the research report is inaccurate, the publishing financial investment company may be liable in tort, if an investor 234 CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

5 Capital Markets 2010 South Korea can demonstrate duty of care, breach of the duty and actual damages incurred. However, if the research report is construed to be an offer of securities or solicitation to purchase securities, it may be subject to the rules applicable to the prospectus, and the publisher may be held strictly liable for the content of the report. To avoid such potential liability, the research report should not contain any reference to the offering because the distribution of information on the offering is considered an offer or solicitation to purchase. It is also advisable for the research report to include a disclaimer that it does not constitute an offer or a solicitation to purchase the shares, and to avoid using any information that has not been publicly disclosed. 15. Is the bookbuilding procedure used and if so, in what circumstances? A bookbuilding procedure called demand forecasting is used in IPOs. The lead managers designate a demand forecasting period for several days and institutional investors are invited to submit their preferred volume and price. The lead managers and the issuer review the results of the demand forecasting and determine the final offering price, which is publicly announced before the subscription dates in an amendment to the securities registration statement. 17. How is the underwriting for an IPO typically structured? What are the typical terms of the underwriting agreement? The underwriting agreement must be disclosed as an attachment to the securities registration statement. As the securities registration statement is filed before the demand forecasting and the determination of the final offer price, the underwriting agreement often provides for a range of the expected offer price. Underwriting obligation is usually that of hard underwriting, which means each underwriter has an obligation to pay the full subscription price for its underwritten volume, not just the remaining volume that has not been subscribed. Typical terms of the underwriting agreements in Korea include: The issuer s representations and warranties. Conditions precedent. Termination clause. Indemnification for breach. Generally, these terms are less extensive in the underwriting agreement for pure domestic offerings. 18. Please provide a summary of the timetable for a typical IPO. Participation in the demand forecasting procedure is not a legally binding subscription. However, the participants in the demand forecasting procedure are in practice required to quote for the same number of shares on the subscription dates, otherwise the participants may be disfavoured in other offerings by those lead managers. Subscription by the institutional investors who participated in the demand forecasting is given priority in the allocation of the offered shares over subscription by non-participant institutions. 16. Where bookbuilding is used, how is any related retail offer dealt with? The securities registration statement designates the percentage of offered securities to be allocated to institutional investors (for example, 60%) and to the general investors including retail (for example, 20%). The general investors do not participate in the demand forecasting, but apply for subscription on the designated subscription dates after the final offering price is publicly announced. Each of the underwriters has its underwritten volume for general investors and may set its own standards for allocation of the offered shares, which must be publicly disclosed in the securities registration statement (for example, a customer with a high trading record may be given priority at the time of allocation). The underwriters require the general investors to deposit a certain portion (often 100%) of the price on the subscription date, and refund the relevant portion of the deposit if the offered shares are oversubscribed and the general investors are not allocated the full amount they subscribed. A rough timeline for a typical domestic IPO conducted only in Korea (not a dual listing or one with overseas offering of a separate tranche) is as follows: T - 5 months. The issuer appoints advisers and prepares for listing (due diligence and compliance with listing). T - 4 months. The issuer and the advisers prepare and file the application of the KRX preliminary review of listing eligibility. T - 2 months. On the KRX approval on the preliminary eligibility, the issuer files the securities registration statement and preliminary prospectus with the FSC. T - 5 weeks. The securities registration statement becomes effective and the final prospectus is prepared. T - 4 weeks. The lead managers conduct the demand forecasting process. T - 3 weeks. The issuer and the lead managers determine the final offer price and publicly announce it. T - 2 weeks. Subscriptions are received on the subscription dates and allocated according to the pre-set standards. T - 1 weeks. The subscription price is paid (that is, closing) and the application for the listing is filed with the KRX. T. Listing and trading begins. 19. Are there rules on price stabilisation in the period after trading starts? In principle, price stabilisation activity is deemed stock price manipulation, which is strictly prohibited and is subject to criminal CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

6 South Korea Capital Markets 2010 penalty. However, price stabilisation after the listing is allowed as market making subject to certain limitations. A financial investment company that intends to act as a market maker must file a report to the FSC in advance, setting out the proposed market making trades. The market making period must be specified in the underwriting agreement, which cannot start earlier than one month after the listing, and cannot last longer than six months after the listing. A purchase at a price above the offering price or a sale at a price below the offering price is not allowed as a market making trade. Any market making trade conducted must be reported to the FSC and the KRX, which publicly disclose such post-trade reports. 20. What is the approximate cost of an IPO? The approximate cost for the issuer is generally between 2% and 5% of the offering size. The cost includes: Lead managers and underwriters fees. Fees to legal counsels and other advisers. Fees to the FSC (0.018% of the offering price). Fees to the KRX: eligibility review fee (KRW5 million (about US$4,200)); initial listing fee (based on a sliding scale according to the offering price or the number of DRs to be listed); annual fee (see Question 2). Public disclosure. Under the Financial Investment Services and Capital Markets Act (FISCMA), listed companies are required to: Publicly file annual, semi-annual and quarterly reports. Disclose when there is a significant event such as a merger, application for corporate rehabilitation proceeding or suspension of an overdraft transaction with a bank. In addition, under the KRX regulations, listed companies are subject to a detailed list of required disclosure items, including new investment exceeding a certain size or a lawsuit filed against it exceeding a certain amount in dispute. Financing regulations. When a listed company issues new shares or convertible securities, the issue price or the conversion price cannot be lower than a certain floor price calculated based on the stock price on the KRX. There are also regulations on the: Valuation of a listed company in connection with a merger. Issue of exchangeable bonds or bonds with profit participation. Repurchase of the company s own shares on the market. Short swing and insider trading. A major shareholder who gains profits from sale and purchase, or purchase and sale, of the corporation s equity securities, must disgorge such profits to the corporation on request, if both transactions occur within a six-month period. Certain defined insiders and people who receive inside information (tippees) cannot trade the securities of the corporation using material non-public information. 21. What are the main tax issues that arise on an IPO? If a company issues new shares to investors or underwriters, or the existing shareholders sell their shares to investors or underwriters, in an IPO, there is no securities transaction tax on such issue or sales. However, when investors or underwriters sell the IPO shares after the purchase, a securities transaction tax of 0.3% or 0.5% of the sale price is imposed on such sales. Corporate governance. Listed companies must comply with certain corporate governance rules, such as maintaining independent directors, a statutory auditor or an audit committee. In addition, there are rules about shareholders rights, such as cumulative voting rules and minority holders rights. Related party transaction. A listed company cannot provide a loan or guarantee or other financing support to its directors, major shareholders and their affiliates, unless it falls under an exception. The sale of existing shares by the shareholders in the IPO may also be subject to corporate income tax or capital gains tax. The rates vary depending on the jurisdiction of the seller, the shareholding of the seller and whether the sale is on the KRX. CONTINUING OBLIGATIONS 22. Please outline any continuing obligations to which listed companies are subject, in particular: The key areas covered by the obligations. Whether the same rules apply to domestic and foreign companies and to issuers of shares and depositary receipts. How these obligations are regulated and any penalties for breach. Key areas A Korean company listed on the KRX is subject to the following key obligations. Domestic and foreign companies The application of the above regulations to foreign companies is limited. Public disclosure. Public disclosure regulations are generally applicable to foreign companies, subject to certain special rules about the timing and forms of the public filings. In addition, foreign companies are required to submit the same disclosures as are required in their jurisdiction. Financing regulations. Foreign companies are explicitly exempt from certain financing regulations, such as those regulating merger valuation or stock repurchase. However, they are not exempt from regulations on issue price or conversion price of stock or convertible securities. Short swing and insider trading. These rules also apply to foreign companies that are listed on the KRX. 236 CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

7 Capital Markets 2010 South Korea Corporate governance and related party transactions. The rules relating to corporate governance and related party transactions are generally understood to not apply to a foreign corporation. However, in practice, the KRX requires many such corporate governance rules to be included in the articles of incorporation of the foreign corporation before listing. Regulation and penalties Depending on the type of breach, the FSC may take administrative actions including: Issue of a corrective order. Prohibition on issue of new securities for a certain period. Proposal to remove directors in charge. If a listed company breaches a disclosure obligation under the KRX, the KRX may publicly announce that the company is put on the watch list and, if the breach continues, cancel the listing. Violation of certain regulations such as filing of annual, semiannual or quarterly reports or the insider trading rule is subject to criminal penalties such as imprisonment or fines. DE-LISTING DEBT CAPITAL MARKETS: GENERAL 25. Please give a brief overview of the debt securities market in your jurisdiction. Has it been active? What were the major deals over the past year? In 2009, corporate bond issues in Korea totalled over KRW90.1 trillion (about US$75 billion) (a total of 2,111 issues), a decrease from KRW101.2 trillion (about US$83 billion) (a total of 2,135 issues) in This figure includes asset-backed securities but does not include securities denominated in foreign currency. The largest issues of corporate bonds in 2009 are as follows: Kia Motors (auto manufacturer), at KRW400 billion (about US$333 million). Korea Hydro & Nuclear Power Co. Ltd. (provider of hydro and nuclear power), at KRW370 billion (about US$308 million). 26. What are the different methods of raising finance through the issue of debt securities in your jurisdiction (for example, bonds or EMTN programmes)? 23. What action is required to de-list a company? Have there been many de-listings on your market(s) in the past year? The following are the main methods of raising finance through the issue of debt securities in Korea. A company can be de-listed involuntarily by the KRX. If certain events occur, the KRX first puts the company on the watch list and if the event continues, de-lists the company. A company can also voluntarily apply for de-listing with shareholders approval. The KRX in practice requires the company or its largest shareholder to purchase the company s outstanding shares up to a certain percentage before de-listing, to provide minority shareholders with a last trading opportunity. In 2009, 18 companies were de-listed from the KOSPI Market of the KRX. One such company was de-listed for becoming wholly owned by a holding company, and the other 17 companies were involuntarily de-listed by the KRX. In 2009, 65 companies were de-listed from the KOSDAQ Market of the KRX. Nine such companies were de-listed on voluntary application or on dissolution, or for becoming wholly owned by a holding company. The rest of the companies were involuntarily de-listed by the KRX. REFORM Bonds Bonds are the most common form of debt securities that Korean corporations issue for financing. While bonds can be in bearer or registered form, in practice, most bonds are issued in registered form. Although there is no restriction on the maturity, bonds usually have a maturity of three years or longer. Bonds can be issued in the form of convertible bonds or bonds with warrants. Regulators have allowed listed companies to issue exchangeable bonds (that is, bonds exchangeable into already issued shares of the same or different corporation). Commercial paper Commercial paper is a standardised form of promissory note, another commonly used debt security. Commercial paper has short maturity, usually three months. Commercial paper is not eligible for KRX listing because of the short maturity. While commercial paper itself cannot have customised terms such as representations or event of default, financial institutions often enter into a bilateral credit agreement with the issuer corporation to purchase the commercial paper. 24. Please summarise any proposals for reform. There are no current proposals for reform. EMTN Korean companies often use the EMTN programme in the overseas market. The medium-term note (MTN) programme is not used in the Korean market. CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

8 South Korea Capital Markets For new issues to be cleared and settled through Euroclear or Clearstream, what percentage use the New Global Note (NGN) structure? What percentage retain the classic or traditional global note structure? No information is available on the percentage of issues using the NGN structure or the classic or traditional global note structure. 28. Please describe the main market(s) (including any exchange-regulated market or multi-lateral trading facility (MTF)) for debt securities and summarise the following in relation to each market: The regulator. Any minimum size requirement. Any minimum trading record required. Any working capital requirements. Number of issues traded. Annual cost of being listed. The KRX has a market for trading listed debt securities. While about 80% to 90% of the corporate bonds are traded on an overthe-counter basis, most of the corporate bonds are listed on the KRX to obtain the maximum liquidity. Regulator The regulators are the FSC and the FSS. in a public offering. However, usually only institutional investors purchase the bonds in a private placement. A securities registration statement is required to be filed for a public offering (see Questions 32 and 33). Corporate bonds are often issued under the Public and Corporate Bond Registration Act. In this case, physical certificates of bonds are not produced, but the designated registration agent issues a certificate of registration to the registered bondholder. In most cases, bonds are registered with the KSD, so that they are transferred and cleared through the electronic transfer system of the KSD. Korean companies often offer debt securities in the overseas market under Rule 144A or Regulations S. Foreign companies issue debt securities denominated in KRW currency (called Arirang bonds) to the Korean investors under the Korean regulations. 30. Briefly outline the role of advisers commonly used when issuing and listing debt securities. The following are the advisers generally involved in an issue of debt securities. Financial investment companies Lead manager. The lead manager advises the issuer on the structure of the offering and various related issues. The lead manager often plays the role of a financial adviser to the issuer when there is no separate financial adviser. The lead manager usually becomes one of the underwriters. The lead manager also often prepares the prospectus. Size limits The minimum size for a bond equity offering is KRW300 million (about US$250,000), unless the bonds are guaranteed or secured by collateral. Trading record There is no trading record requirement. Working capital There is no working capital requirement. Number of issues traded There are about 9,525 issues of corporate bonds trading on the KRX, and among these, about 4,610 issues were issued by special government corporations. Annual cost The annual fee to maintain the listing of a corporate bond issue is KRW100,000 (about US$83). LISTING ON THE MAIN DEBT CAPITAL MARKET(S) 29. What are the main ways of issuing debt securities on the debt capital market(s)? Underwriter. Underwriters undertake to purchase the securities to be offered. Global co-ordinator or placing agent. When debt securities are offered overseas, global investment banks become involved to market and co-ordinate the overseas offering. Financial adviser. The issuer sometimes retains a separate financial advisor, especially when the securities are convertible or otherwise equity related or the debt securities are offered overseas. Legal counsel Legal counsels are not actively involved in a domestic offering of pure debt securities. If the securities are convertible or otherwise equity related, or the debt securities are offered overseas, legal counsels are more actively involved in the structuring, documentation and due diligence. The discussion of the issuer s counsel and the underwriters counsel for equity offerings generally applies to debt offerings (see Question 5). Accounting firms The securities registration statement must accompany the external auditor s (accounting firm s) audit and review reports for the recent fiscal year, half-year and quarter. Accounting firms are not actively involved in domestic bond offerings if these audit or review reports have already been issued to the issuer. Debt securities can be issued through public offering or private placement. Retail investors are invited to purchase the bonds 238 CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

9 Capital Markets 2010 South Korea 31. What are the principal documents produced when issuing and listing debt securities? The principal documents produced in a public offering of corporate bonds are: Prospectus and securities registration statement. Mandatory public disclosures such as result of public offering. Issuer s board resolutions. Lead manager agreement and underwriting agreement. Bond trustee agreement. Application to KSD for entry into the electronic transfer system. Listing application to the KRX. In some private transactions, many of the above documents including the prospectus, the securities registration statement and the listing application are not produced. 32. Please summarise the requirements for a prospectus (or other main offering document). Any domestic offering in the amount of KRW1 billion (about US$833,000) or greater to 50 or more investors within a six month period requires a filing of a securities registration statement with the FSC. Certain professional investors or those affiliated with the largest shareholder are not counted towards the 50 investor threshold. To avoid the registration statement filing requirement, the number of bond certificates must be less than 50, and the bond certificates cannot be exchanged for smaller denominations within one year from the issue. If the debt securities are convertible, a lockup similar to the one applicable for equity offerings (see Question 7) or a restriction on the conversion period must be met, to avoid filing a securities registration statement. When the securities registration statement is required, marketing is only allowed using the preliminary or final prospectus filed with the FSC, or shorter materials called the simplified prospectus that meet certain requirements. The content of the preliminary or final prospectus is almost identical to the securities registration statement. THE REGULATORY AUTHORITY Financial Supervisory Service Head. Kim, Jong-Chang (Governor) Contact details. 97 Yeoui-daero Youngdeungpo-gu Seoul T or (International Affairs Support Team) F E governor@fss.or.kr or fssintl@fss.or.kr (International Affairs Support Team) W Main responsibilities. The FSC is a committee with the power to license or approve mergers and acquisitions of financial institutions, supervise and manage the capital market and determine administrative penalties for violation of financial laws and regulations. The FSS is the enforcement arm under the FSC that deals with: Day-to-day supervision of financial institutions and the capital market. Investigation of violations of the capital market laws and proposal of sanctions. Protection of consumers. Any offering the size of which is smaller than KRW1 billion (about US$833,000). Any offering with 49 or less bond certificates that cannot be exchanged for bond certificates in smaller denomination within one year. Any offering in the secondary market to the exempt categories of persons. 34. Please outline the content of the prospectus (or other main offering document). For the content of the registration statement and the prospectus where such documents are required to be produced for debt offering, see Question 10. Any overseas offering in the amount of KRW1 billion or greater requires filing of a securities statement with the FSC, unless the bonds are only issued to and traded among qualified professional investors, or certain appropriate measures are taken to prevent the offered bonds from flowing back into Korean investors hands. In connection with an overseas offering, a prospectus in English is also prepared. 33. Are there any exemptions from the requirements for a prospectus (or other main offering document)? A debt offering can be structured to avoid the registration statement and prospectus filing requirement. The exemptions include: 35. How is the prospectus (or other main offering document) prepared and verified? See Question Who is responsible for the content of the prospectus (or other main offering document) and any liability arising from its content? See Question 12. CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

10 South Korea Capital Markets Briefly explain the ways used to market debt securities. See Question Please provide a summary of the timetable for issuing and listing debt securities. The timetable of a bond issue can vary from a few days to several months, depending on various factors including the requirement of a securities registration statement, the complexity of the terms and conditions and their negotiation, and whether the issuer is a first-time issuer. A rough timeline for a typical public offering of straight bonds in Korea is as follows: T - 2 weeks. The issuer files the securities registration statement and preliminary prospectus with the FSC. T - 1 weeks. The securities registration statement becomes effective and the final prospectus is prepared. T - 3 days. Subscriptions are received on the subscription dates. T. The subscription price is paid (that is, closing) and the bonds are listed on the KRX. Whether the same rules apply to domestic and foreign issuers. How these obligations are regulated and any penalties for breach. Key areas Public disclosure. Under the FISCMA, companies with debt securities listed on the KRW are required to publicly file: Annual, semi-annual and quarterly reports. Reports of major events such as a merger, application for corporate rehabilitation proceedings or suspension of an overdraft transaction with a bank. Domestic and foreign issuers Public disclosure regulations generally apply to foreign companies. However, there are certain special rules for foreign companies about the timing and forms of public filings. Regulation and penalties If the disclosure obligation is not complied with, the FSC can take administrative action, including: Issuance of a corrective order. Prohibition on issuance of new securities for certain period. 39. What is the approximate cost of issuing and listing debt securities? The approximate cost of a domestic bond offering for the issuer is generally around 1% of the offering size. The cost includes: Lead managers and underwriters fee. Fees to legal counsels and other advisers. Fees to the FSC. Fees to the KRX: initial listing fee (based on a sliding scale according to the offering size, with a maximum of KRW1.7 million (about US$1,400) for an offering of KRW500 billion (about US$416 million) or greater); annual fee (KRW100,000 (about US$83)). 40. What are the main tax issues that arise when issuing and listing debt securities? Proposal to remove directors in charge. In addition, the breach may be subject to criminal penalties such as imprisonment or fine. REFORM 42. Please summarise any proposals for reform. An amendment to the Korean Commercial Code has been proposed by the government, which would allow more flexibility in the form of corporate bonds that can be issued, for example index-linked bonds or credit-linked bonds. In addition, the FSC is considering new systems to facilitate the issue and trading of debt securities, such as a debt securities quoting and trading system that would replace the over-thecounter market where currently 80% to 90% of corporate bonds are traded, and a reduced filing requirement for a bond issue to Qualified Institutional Buyers (QIBs). The payment of interest on bonds may be subject to withholding tax, depending on the jurisdiction of the bond holder. CONTINUING OBLIGATIONS 41. Please outline any continuing obligations to which companies with listed debt securities are subject, in particular: The key areas covered by the obligations. CONTRIBUTOR DETAILS Bo-Yong Ahn and Jihay Ellie Kwack Kim & Chang T F /3 E byahn@kimchang.com jihay.kwack@kimchang.com W CROSS-BORDER HANDBOOKS This article was first published in the Cross-border Capital Markets Handbook 2010 and is reproduced with the permission of the publisher,

11 NAtioNAl law Firm of the YEAr - iflr ASiAN AwArdS, EvErY YEAr SiNCE 2002 Year Established : 1973 Number of Professionals : Approximately 700 Languages Spoken : Korean, English, German, French, Japanese, Chinese, Swedish and Spanish Corporate Finance - Anti-Corruption and Regulatory Compliance - Antitrust and Competition - Broadcasting & Telecommunication - Construction - Corporate Governance - Customs and International Trade - Energy - Entertainment - Environment - Foreign Direct Investment - Health - Insolvency and Restructuring - Labor and Employment - Mergers & Acquisitions - Overseas Investment - Private Equity and Venture Capital - Real Estate Criminal Defense - White Collar Criminal Defense - Acquisition Finance - Banking - Derivatives - Financial Institutions - Insolvency and Restructuring - Insurance - Investment Management - Lease and Transportation Finance - Private Equity and Venture Capital - Project Finance - Securities - Structured Finance Industry - Banking - Broadcasting & Telecommunication - Construction - Energy - Entertainment - Financial Institutions - Health - Insurance - Investment Management - Private Equity and Venture Capital - Securities Intellectual Property - Intellectual Property International - Chinese Practice - European Practice - Japanese Practice Litigation - Construction - Insolvency and Restructuring - International Arbitration & Cross-Border Litigation - Litigation & Arbitration - Product Liability / Consumer Claims - Shipping Tax - Finance Tax - General Tax Consulting - Tax Audit and Dispute Resolution - Transfer Pricing Seyang Building, 223 Naeja-dong, Jongno-gu, Seoul , Korea Tel Fax lawkim@kimchang.com