Latest development on the operation of share incentive scheme in Korea

Overview of the development 

On 19 June 2023, Korea’s Financial Supervisory Service ('FSS') issued a press release in Korean (here) providing guidance on Korean-resident employees’ disposal of overseas-listed shares acquired through share incentive schemes of global companies. The press release is not an amendment to the existing laws and regulations but rather to provide additional guidance.

In summary, the FSS provided in its press release that it is a breach of Korean law if (i) a Korean-resident employee sells the shares of a foreign listed company which he/she obtained from a share incentive scheme through a foreign broker or (ii) deposits the proceeds of the sale of such shares into a foreign financial institution without having filed a prior report of such funds with a relevant foreign exchange bank or regulator in Korea.  In other words, the FSS’s view is that Korean-resident employees are required to deposit the overseas listed shares that they receive from a share incentive scheme into a securities account with a Korean licensed broker before they can transact or sell those shares.  

From speaking to our Korean partner firms, we understand that the focus of the FSS in the press release is mainly the receipt of the proceeds of the sale of overseas shares.  If a Korean-resident employee receives proceeds from selling the overseas shares he/she acquired in a share incentive scheme without involving a Korean licensed broker, this would be a violation of the Foreign Exchange Transactions Act and the employee may be penalised with an administrative fine of up to KRW 50 million (roughly equivalent to USD39,000). The fine varies depending on the amount of the sale proceeds, and whether the employee has self-reported the violation.  If the sale proceeds are USD10,000 or less, only a warning will be issued.  A 2% administrative fine will be charged on sale proceeds exceeding USD10,000. 

The aftermath 

Following the press release, we have heard anecdotally from our Korean partner firms instances where Korean banks have refused to process Korean-resident employees’ remittance of funds from the sale of their overseas shares into Korea because the employees have not complied with the relevant requirements.

The FSS’s position in the press release represents a material departure from existing market practice and has led to confusion both domestically and internationally.

The position that the FSS has taken in the press release introduces two key problems from employers’ perspective.

Firstly, employers commonly facilitate employees’ option exercises and payment of tax liabilities through arrangements whereby a portion of the shares underlying a share award is sold on behalf of the employees to cover such exercise prices and/or tax liabilities. The latest FSS position would, however, make such arrangements outside of Korea unlawful, as employees would first need to deposit the shares underlying their awards in securities account with a Korean licensed broker before they can transact.

Secondly, many employers use one single global service provider which provides administration, trustee and brokerage services on their platform – these service providers are often favoured for their one-stop solution. However, these global service providers may no longer be feasible for Korean-resident employees because they do not have the necessary domestic brokerage licenses to allow employees to transact their shares.  

It is notable that the compliance obligation is on Korean-resident employees - there are no liabilities for the employer (whether the domestic Korean entity or the overseas parent company). However, in operating a share incentive scheme designed to reward and incentivise key talent, companies would certainly not want the scheme to result in their Korean-resident employees’ non-compliance with local laws or inability to recognise value from the scheme.

Next steps

It is possible that further guidance and practices will develop to accommodate the market concerns.

In the meantime, as an interim step, employers may want to consider suspending the sale of shares by their Korean-resident employees (including, for example, sell-to-cover / cashless exercise arrangements).

A number of clients who operate global share incentive schemes with participants in Korea have already approached us to discuss possible solutions.  We are working with them to devise strategies to deal with (i) shares of Korean-resident employees that are currently sitting in foreign brokerage accounts, (ii) share awards of Korean-resident employees which have not yet vested or have not yet been exercised; and/or (iii) future share awards which will be granted to Korean-resident employees.  The strategy may consist of a multi-pronged approach, depending on the type of share incentive awards involved, the population of participants in Korea, where the employer is listed, the relevant companies law and tax considerations, as well as the platform that the employer currently uses.

We are working closely with our Korean partner firms and will monitor any development in the area. Please feel free to contact the authors of this blogpost or your normal Freshfields contacts if you wish to discuss share incentive schemes operations in Korea.