Five percent rule

Five percent (5%) rule refers to the threshold criteria of stock ownership whether a report to the supervisory authorities is required (주식대량보유보고의무/株式大量保有報告義務) under the Financial Investment Services and Capital Markets Act (the "Capital Markets Act" 자본시장과 금융투자업에 관한 법률).

Key words
five percent, shock ownership, takeover, tender offer bid (TOB), stock-listed company, unfair trading

Purpose
Five percent rule is important and necessary:
 * to provide incumbent management with an opportunity to defend against hostile takeover;
 * to give a window to look into the ownership of shareholders to takeover bidders; and
 * to deter unfair trading of stocks by showing transparent ownership of shareholders.

In this case, stocks cover not only voting stocks but also convertible bonds (CB), bonds with warrant (WB) and exchangeable bonds (EB).

Five percent rule is so important that the violation of the rule leads to the prevention of exercise of stock ownership in excess of five percent and the mandatory disposition of such excessive ownership in a certain period of time.

Statutory ground
The "Capital Markets Act" (자본시장법) stipulates the five percent rule as follows:

Article 147 (Report on Stocks, etc. Held in Bulk)
 * (1) A person who holds stocks, etc. of any stock-listed corporation in bulk (referring to a case where the aggregate of the number of stocks, etc. held by a person and his/her specially related persons reaches or exceeds 5/100 of the total number of stocks, etc.) shall report the status of stocks in hand, the purpose of holding (referring to whether he/she has any intention to exercise an influence on the issuer’s business control), the essential details of the contract related to the stocks, etc. in hand, and other matters prescribed by Presidential Decree, to the Financial Services Commission and the Korea Exchange in a manner prescribed by Presidential Decree within five days from the date on which the person becomes a holder of the stocks in such a quantity (excluding the days specified by Presidential Decree; hereafter the same shall apply in this Section), and shall also report the details of a change, when there is a change in the aggregate of the number of stocks, etc. in hand to the extent of 1/100 of the total number of stocks, etc. or more (excluding cases where there is no change in the number of stocks, etc. in hand or other case prescribed by Presidential Decree), to the Financial Services Commission and the Korea Exchange within five days from the date on which such change occurs in a manner prescribed by Presidential Decree. In this regard, the details, timing, etc. of the report may be varied by Presidential Decree, in cases where the purpose of holding the stocks is not to exercise an influence over the issuer’s business control (referring to appointment and dismissal of executives, or suspension of their duties, amendment of the articles of incorporation in connection with the organs of the company such as the board of directors, as prescribed further by Presidential Decree) and in cases where a professional investor specified by Presidential Decree is involved. 
 * (2) The number of stocks, etc. and the total number of stocks, etc. under paragraph (1) shall be those calculated by formula prescribed by Ordinance of the Prime Minister. 
 * (3) When an event occurs before the date on which the status of stocks, etc. held in bulk, the purpose of such holding, or the details of a change shall be reported in accordance with paragraph (1) to trigger a duty to report a new change, the details of such a new change shall be reported together at the time the original status of stocks, etc. held in bulk, the purpose of such holding, or the details of a change is reported.
 * (4) A person who has filed a report in accordance with paragraph (1) shall, whenever there is a change in a material fact, as specified by Presidential Decree, such as a change in an essential term or condition of the contract related to the purpose of such holding or the stocks, etc. held in hand, report it to the Financial Services Commission and the Korea Exchange. 

Article 133 (Subject Matters of Public Tender Offer)
 * (1)The term “public tender offer” in this Section means to make an offer to a multiple number of unspecified people to purchase (including an exchange with other securities; hereafter the same shall apply in this Section) voting stocks or any other securities specified by Presidential Decree (hereinafter referred to as “stocks, etc.”) or to invite them to sell (including an exchange with other securities; hereafter the same shall apply in this Section) such stocks, etc. and purchase them outside the securities exchange (including a market in a foreign country similar to it; hereafter the same shall apply in this Section).
 * (2) The term “tender offer agent” means a person who handles the affairs related to safekeeping of stocks, etc. subject to purchasing, exchanging, bidding, or otherwise acquiring for consideration (hereafter referred to as “purchase, etc.” in this Section) payment or delivery of the fund necessary for public tender offer or the securities for exchanging, and other affairs related to public tender offer on behalf of the person who intends to make a public tender offer.
 * (3) A person who intends to make a purchase, etc. of stocks, etc. from a number of persons, equivalent to or more than the number of those prescribed by Presidential Decree, outside the securities exchange shall make a public tender offer, if the aggregate of the number of stocks, etc. held (including those owned and similarly possessed, as prescribed further by Presidential Decree; hereafter the same shall apply in this Section and Section 2) by him/herself and his/her specially related persons (referring to those who have a special relationship as determined by Presidential Decree; hereinafter the same shall apply) reaches or exceeds 5/100 of the total number of the stocks, etc. (including cases in which a person whose aggregate of the number of stocks, etc. held by the person and his/her specially related persons reaches or exceeds 5/100 of the total number of stocks, etc. makes a public tender offer for purchase, etc. of such stocks, etc.): Provided, That stocks, etc. may be purchased by any means other than public tender offer, in the case of purchasing, etc. prescribed by Presidential Decree, considering the purpose and form of purchasing, etc., and the possibility of causing a detriment to other shareholder’s interests.
 * (4) In applying paragraph (3), purchasing of stocks, etc., by any means other than competitive trading in the securities exchange, as prescribed by Presidential Decree, shall be deemed to have been made outside the securities exchange.
 * (5) The number and total number of stocks, etc. under paragraph (3) shall be the numbers calculated by a formula prescribed by Ordinance of the Prime Minister. 

Five percent rule in other areas
Five percent rule is important in the observance of other matters like: According to Footnote 2 Anti-Dumping Agreement, domestic sales of the like product are sufficient to base normal value on if they account for 5 percent or more of the sales of the product under consideration to the importing country market. This is often called the-five-per-cent or home-market-viability test. This test is applied globally by comparing quantity sold of like product on the domestic market with quantity sold to importing market.
 * Investment trust: Article 190. Beneficiaries' general meeting (투자신탁 수익자총회)
 * Ownership of KRX: Article 406 (한국거래소 주식의 소유제한)
 * Anti-dumping policy (반덤핑 정책)

Normal value cannot be based on the price in the exporter’s domestic market when there are no domestic sales. For example, if the products are sold only for foreign market, the normal value will have to be determined on another basis. Besides, the products may be sold on both markets but the quantity sold on the domestic market is small compared to quantity sold on foreign market. This situation often happens in countries with small home market (Hong Kong, Singapore for example). Large market, however, may face the same situation while the like products are sold in significant on both markets, some types of products are sold in larger quantity on foreign market while other types are vice versa. This is because of differences in consumer tastes, maintenance, etc.. This leads to some exported types of products are sold in small quantities on the domestic market.

Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country. Therefore, a detailed investigation has to be conducted according to specified rules first. The investigation must evaluate all relevant economic factors that have a bearing on the state of the industry in question. If the investigation shows dumping is taking place and domestic industry is being hurt, the exporting company can undertake to raise its price to an agreed level in order to avoid anti-dumping import duty.