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Korea: Shares acquired under employee share plans to be exempt from domestic broker requirement

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In brief

As discussed in our July 2023 client alert, on 19 June 2023, the Korean Financial Supervisory Service (FSS) issued a notice according to which domestic employees can be sanctioned for violating the Foreign Exchange Transaction Act if they sell foreign-listed shares through an overseas broker or deposit funds resulting from the sale of foreign-listed shares with an overseas financial institution. To avoid sanctions, domestic employees are required to open an account with a Korean domestic broker, transfer the foreign-listed shares to such account, sell the shares through the domestic broker, and deposit the proceeds into an account with the domestic broker. 

After the notice was issued, it became quite common for Korean banks to reject funds wired from foreign brokerage accounts on the basis that these proceeds were obtained in violation of the Foreign Exchange Transaction Act. Korean employees who want to sell such shares are therefore required to engage a Korean broker and work with their foreign broker to transfer the shares to such broker. Although several Korean brokers have emerged who are able to assist and sell foreign-listed shares on foreign stock exchanges, the process remains, of course, cumbersome for employees to set up and can impact the timing of the sale of shares. Further, for stock options, it effectively has made a broker-assisted cashless exercise impossible because this typically requires the designated foreign broker to immediately sell shares at exercise.

Update

Accordingly, it is very welcome news that, on 29 December 2023, the Korean Financial Services Commission (FSC) issued an advance notice of legislative action which would allow domestic employees of multinational companies who have acquired shares under a stock-based compensation program to sell such shares without the involvement of a Korean broker and to deposit proceeds from the sale of shares into an account with an overseas financial institution. It is expected that the legislative action will go into effect in late February/early March 2024. 

Next Steps

Until the legislative action takes effect, the domestic broker requirement introduced by the June 2023 notice remains in place. Thus, until then, Korean domestic employees will need to sell shares through a Korean broker and may not deposit proceeds from the sale of shares with an overseas financial institution. 

For more details, please see the client alert issued by the Korean law firm Kim & Chang, which also includes an update on the new employer tax reporting obligations for stock-based compensation that came into effect on 1 January 2024. 

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Author

Denise Glagau is a partner in the Firm's North America Employment and Compensation practice and leads the Compensation practice in the Firm's California offices. Denise has authored several articles and frequently speaks on topics of interest for legal and other professionals dealing with share plan issues. She is on the Advisory Board of the Certified Equity Professionals Institute (CEPI) of Santa Clara University and is a member of the National Association of Stock Plan Professionals (NASPP) and Global Equity Organization (GEO). She is recognized as a ranked practitioner by Chambers USA in the area of Employee Benefits & Executive Compensation. She is also a member of the Firm's Financial Institutions and Healthcare & Life Sciences Industry Groups.

Author

Barbara Klementz is the chair of Baker McKenzie’s North American Compensation Practice. She has practiced in the area of global equity and executive compensation for over 20 years. Barbara has authored several articles on global equity issues for the BNA Executive Compensation Journal, Journal of Corporate Taxation and San Francisco and Los Angeles Daily Journal, among others, and she is the author of a blog on global equity related topics called the Global Equity Equation. She is also a frequent speaker on a variety of global equity topics. Barbara is recognized as a ranked practitioner by Chambers USA. Chambers states that she "consistently delivers top-notch assistance and work product, and is a true expert in the field." Barbara is admitted to private practice in California and Düsseldorf, Germany.

Author

Brian K. Wydajewski practices in the area of compensation and employment. He also heads the Chicago Office’s Global Equity Services Practice which assists multinational corporations with the design, implementation and operation of global equity compensation plans. Mr. Wydajewski has authored numerous articles, and is a frequent speaker on employee benefits, executive compensation and global equity compensation issues. In addition, Mr. Wydajewski is past chair of the Illinois State Bar Association’s Employee Benefits Section Council, and is an adjunct professor at the Center for Tax Law and Employee Benefits at the John Marshall Law School.

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