STOCK PURCHASE AND FOREIGN EXCHANGE TRANSACTIONS REPORTING

by Andrew Baek

July 17, 2024

Non-resident foreign clients subscribing to new shares or acquiring outstanding shares of a stock company in Korea execute a share subscription agreement or a share purchase agreement, sometimes together with a shareholders’ agreement.

Because these transactions typically involve foreign exchange transactions (e.g., transferring funds from an overseas account to a domestic account), the foreign client generally has to file a report with the competent authority in Korea, detailing the transaction. Depending on the amount and the nature of the investment, the foreign client would either file a report on “Acquisition of Securities by a Non-Resident” to the head of a foreign exchange bank or a report on “Foreign Investment” to the Minister of Trade, Industry, and Energy.

Notwithstanding, if the foreign client is acquiring outstanding shares of a stock company in Korea from another non-resident, the client may be exempt from any foreign exchange reporting duties. This exemption applies when (i) the investment does NOT qualify as a "Foreign Investment" under the Foreign Investment Promotion Act and (ii) the non-resident seller has acquired those shares through an acknowledged transaction, meaning that the seller properly reported its purchase or was also exempted from reporting.

Violating foreign exchange laws and regulations could expose the foreign client to penalties and sanctions. Therefore, even if purchasing shares from a non-resident who claims to have acquired the shares through an acknowledged transaction, the foreign client should request a certificate of completion of the report from the seller, or at the very least, a written guarantee that the seller acquired the shares through an acknowledged transaction. This guarantee can be included in the respective share purchase agreement within the seller’s representations and warranties section.

A well-drafted share purchase agreement can prevent future disputes and provide a clear roadmap for the transaction, ensuring both the seller and the buyer have a mutual understanding and agreement on the deal’s terms. Whether the foreign client is a buyer or a seller, having an experienced attorney draft and review the share purchase agreement is crucial for protecting the client’s interests and complying with local laws.

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