Advisory Case on Preventing Legal Risks in Share Transfers Between Related Parties in the Over-the-Counter Market

The client was a company that had been a listed company in the past but, after delisting procedures had been carried out, was reviewing the possibility of future registration on the over-the-counter (OTC) trading market. It requested a legal review of whether a transfer of shares between a major shareholder and its specially-related persons was possible. The client was considering transferring some of its shares to specially-related persons for the purposes of reorganizing its corporate governance and managing its shareholdings over the long term, but it needed to confirm in advance whether such a transaction was permitted under capital-market regulations and whether legal risks could arise depending on the transaction method. In particular, the main matters raised for review were whether a share transfer using the OTC market was possible, whether transactions between specially-related parties could become subject to regulation, and whether legal problems could arise in relation to inside information that might exist at the time of the transaction.

The core issues in this matter were broadly threefold. First, whether a transfer of shares between a major shareholder and a specially-related person within the OTC market was legally possible. Second, whether transferring shares to a specific counterparty using a market trading method could run afoul of regulations related to market order. Third, whether, if a transaction were carried out in connection with the company's inside information, there was a risk that it would be assessed as the use of material non-public information.

Law Firm Insight comprehensively reviewed the relevant statutes and the market's operating structure, and explained that, in principle, in the OTC market, the transaction itself - submitting buy or sell orders in the same manner as ordinary investors - is possible. However, it advised that, since the OTC market is also an open trading system in which many investors participate, if a transaction structure were artificially designed for the purpose of transferring shares to a specific counterparty, problems related to capital-market regulation could arise.

In addition, since the capital-market statutes apply the prohibition on the use of material non-public information equally to OTC transactions as well as on-exchange transactions, the firm explained that, if a transaction were carried out while an insider held information that could have a significant impact on investment judgment, legal liability could become an issue. In particular, it presented a direction for risk management based on the standard that whether the information was disclosed at the time of the transaction, whether the person had insider status, and whether the information was used are comprehensively taken into account as the criteria for judgment.

Through this advice, the client came to clearly recognize both that a transfer of shares between specially-related parties is not absolutely prohibited by law, and that the risk of violating capital-market regulations could arise depending on the transaction method and information circumstances. Accordingly, the client was able to re-examine transaction structures whose sole purpose was a simple share transfer, and to reorganize its shareholding-management strategy in a direction that strengthened its management of transaction timing and inside information.

This case is significant in that it is an example of forestalling the possibility of potential legal disputes by reviewing in advance the capital-market regulatory risks that can arise in the process of changing a company's shareholding structure. In particular, it demonstrates that, even in the sensitive structure of a transaction between specially-related parties, by reviewing both the transaction method and the information-management system, a company can establish its shareholding strategy while minimizing regulatory risk.

In the process of transferring shares or reorganizing corporate governance, beyond a simple civil transaction structure, capital-market regulation, disclosure obligations, and insider-trading regulation can all become issues at the same time. In such situations, designing the transaction structure in advance through a review by legal experts can play an important role in securing a company's legal stability.

Law Firm Insight diagnoses in advance the various legal risks that can arise in the process of changes to a company's shareholding structure and responses to financial regulation, and presents practically implementable directions for resolution.