Must Profits Be Returned Where Shares Were Bought and Sold Within Six Months, Even If Long-Held Shares Were Sold? The Scope of, and Exceptions to, the Return of Short-Swing Profits

Question

Article 172(1) of the Financial Investment Services and Capital Markets Act (the Capital Markets Act) allows a stock-listed corporation to claim the return of profits where its officers, certain employees or major shareholders have obtained profits by selling the corporation's specified securities, etc. within six months after buying them, or by buying them within six months after selling them. Unlike Article 174, which prohibits the use of material non-public information in trading, this regime imposes liability on the basis of the outward form alone, namely trading within the prescribed period.

Two questions arise from this strict structure. First, where an insider held the same securities from before the six-month period and both bought and sold within that period, whether the scope of the return is reduced on the ground that the shares sold were shares bought earlier. Second, whether a transaction that does not fall within the exceptions listed in the Enforcement Decree nonetheless escapes the liability to return profits if it is of a type in which there is objectively no possibility of using inside information.

The two questions start from the same purpose of the regime and arrive at conclusions pointing in different directions. One widens the scope of the return; the other opens a gateway that excludes its application. This brief asks how the two conclusions can stand together and which facts lie at the boundary between them.

This brief does not determine whether profits must be returned in any particular transaction, or the amount to be returned. It sets out the materials to be checked and the points at which interpretations diverge, within the scope of what the summaries of holdings state. The case in 2020Da202616 concerned transactions conducted in proceedings under the former Corporate Restructuring Promotion Act (Act No. 10684 of 19 May 2011), which has already ceased to be in force; the relevant provisions, including Article 198 of the Enforcement Decree, should therefore be read according to their wording at the time of the transactions.

Material to check

First, the requirements of Article 172(1) can be checked. The persons liable to return profits are the officers of a stock-listed corporation (including the persons listed in the subparagraphs of Article 401-2(1) of the Commercial Act), employees prescribed by Presidential Decree who, in the course of their duties, may have access to material non-public information as referred to in Article 174(1), and major shareholders. The securities covered are securities issued by the corporation, depositary receipts related to them, exchangeable bonds issued by a person other than the corporation that are exchangeable for those securities, and financial investment instruments having only these as underlying assets. Purchase and sale include certain transactions in the opposite direction where the person becomes the counterparty to the exercise of a right or is able to exercise a right.

Second, the remaining paragraphs of Article 172 can be checked. Paragraph (2) allows a shareholder to request the corporation to claim the return, and, if the corporation does not make the claim within two months from the date of the request, allows the shareholder to make the claim by subrogation on behalf of the corporation. Paragraph (3) provides for notification by the Securities and Futures Commission and public disclosure by the corporation, and paragraph (4) for a successful shareholder's claim for costs. Paragraph (5) provides that this right is extinguished if not exercised within two years from the date on which the profits were acquired, and paragraph (6) provides that paragraph (1) does not apply in cases prescribed by Presidential Decree or where a major shareholder was not a major shareholder at either the time of sale or the time of purchase.

Third, there are the provisions defining the employees and major shareholders subject to the return. Article 194 of the Enforcement Decree covers employees engaged in the formulation, modification, implementation or disclosure, etc. of the matters listed in the subparagraphs of Article 161(1) of the Act, which sets out the grounds for submitting a report on material matters, and employees engaged in finance, accounting, planning or research and development, whom the Securities and Futures Commission recognises as persons who may have access to material non-public information. Article 9(1) of the Capital Markets Act defines a large shareholder as a shareholder under Article 2, subparagraph 6 of the Act on Corporate Governance of Financial Companies, and item (b) of that subparagraph designates as major shareholders, among others, persons who own, on their own account and in whatever name, 10/100 or more of the total number of issued voting shares. The summary of holdings in 2022Da253724 likewise describes a major shareholder as a person holding 10% or more of the shares.

Fourth, the method of calculating the profits can be checked. Article 195(1), subparagraph 1 of the Enforcement Decree calculates the profits, where a sale or purchase takes place within six months after a purchase or sale, as the amount obtained by subtracting the purchase unit price from the sale unit price, multiplying the result by the lesser of the quantity purchased and the quantity sold (the matched trading quantity), and deducting the trading commissions, securities transaction tax and special tax for rural development attributable to that quantity. Subparagraph 2 provides that, where trading occurs two or more times within six months, the earliest purchase is matched with the earliest sale, and the same method is applied in turn until no portions remain to be matched. On its wording, the calculation is structured to pair purchases and sales within the period by quantity, rather than to identify which shares were sold.

Fifth, there is the list of exceptions in Article 198 of the Enforcement Decree. The current provision has 13 subparagraphs, including purchases or sales that are unavoidable under statutes; trading pursuant to a governmental permission, authorisation or approval, etc., or to guidance or a recommendation given in writing; stabilisation or market-making; acquisition and disposal arising from underwriting; exercise of stock options; acquisition of shares through the exercise of rights attached to securities already owned; disposal through the exercise of appraisal rights; disposal in response to a tender offer; and, ultimately, cases recognised by the Securities and Futures Commission as presenting no risk of the use of material non-public information (subparagraph 13). As the provision bears amendment notes dated 7 December 2010, 27 August 2013 and 25 June 2019, which subparagraphs existed at the time of a transaction is a separate matter to be checked.

Sixth, there are the transaction records. The following can be matched up: the dates, quantities and unit prices of purchases and sales within the six-month window; the quantity held from before the window; the insider's status at each point of trading (whether serving as an officer, whether a major shareholder); the decision on which the transaction was based (a resolution of the council of creditor financial institutions, a statutory obligation, governmental guidance, etc.); and materials showing whether, under that decision, the party to the transaction could choose whether, when and on what terms to acquire.

Possible readings

One line of interpretation defines the scope of the return by the matching of quantities. On this reading, if there were both a purchase and a sale within six months, liability to return arises to the extent of the matched trading quantity, and it is not asked whether the shares sold were shares bought before the six-month period. 2022Da253724 adopted this reading on the grounds that the provision does not require the securities sold to be identified as those purchased within the period, that the provision also regulates the sale-then-purchase pattern, that paragraph (6) on major shareholders is structured as it is, and that this does not amount to an excessive restriction of property rights.

The opposing reading holds that only profits arising from shares actually held for a short period are subject to the return. The argument is that, where shares held from before the six-month period are sold, no profit has been obtained through short-swing trading. The summary of holdings in 2022Da253724 stated the opposite conclusion, and the order reversed the judgment below and remanded the case. The summary of holdings does not state the reasons for the lower court's decision, but the concern underlying this argument, namely that the strictness of the regime may diverge from the substance of the transaction, connects with the discussion of exceptions in the next judgment.

As to exceptions, there is first the reading of exhaustive enumeration. On this reading, the exceptions in Article 198 of the Enforcement Decree are exhaustively enumerated, and there is no contemplation of extending exceptions to the liability to return profits to grounds not prescribed in the Enforcement Decree. This interpretation seeks to preserve the predictability of a regime that imposes strict liability, and 2020Da202616 also first confirmed this principle.

Alongside this, however, there is the reading of exclusion by type. Even where a transaction does not fall within an exception in the Enforcement Decree, a court may exclude the application of Article 172(1) by treating a type of transaction in which, viewed objectively, there is no possibility whatsoever of improper use of inside information as not constituting a purchase or sale under that paragraph. What is assessed is not whether information was actually used in the individual transaction but the nature of the type of transaction itself, and, if either the preceding or the subsequent transaction falls within an exception, the return provision does not apply absent special circumstances. 2020Da202616 relied on the legislative purpose of the regime, the nature of the exceptions, and the purport of the guarantee of property rights under Article 23 of the Constitution.

The boundary between the two judgments rests on the same yardstick, namely the possibility of use. A transaction structured such that use of information is probable requires a return to the extent of the matched quantity, even if no information was actually used and long-held shares were included; a type of transaction in which that possibility is objectively non-existent falls outside the return. In the middle ground, for example a transaction carried out within restructuring proceedings but in which the parties' choices played a part in whether, when or on what terms to acquire, the assessment may diverge. In 2020Da202616, the lower court's principal reason, that whether, when and on what terms the shares were acquired could not be regarded as having been determined at will by weighing the economic interests of the creditor financial institutions, also relates to this point.

Which reading to adopt is for the reader to decide after matching up the timeline and quantities of the transactions, changes in insider status, and the procedure by which the transactions were decided and the degree of discretion involved. This brief does not conclude on the liability to return profits in any particular transaction.

What the decisions held

Supreme Court Judgment 2022Da253724 rendered on 31 August 2023 held: "Where an insider of a stock-listed corporation has bought and sold securities issued by that corporation within six months, the insider is liable to return short-swing profits to the extent that the quantities bought and sold match, and the same applies even if the insider already held the same securities issued by that stock-listed corporation before the six-month period subject to the return of short-swing profits."

As its reasons, the same judgment cited the following: that the regime seeks to regulate short-term trading indirectly, without asking whether the insider actually used undisclosed inside information or intended to profit; that the provision does not require the securities sold to be identified and recognises liability for a purchase following a sale as well; that paragraph (6) on major shareholders presupposes holdings from before the period; and that the calculation of profits is limited to the lesser of the quantities of securities sold and securities purchased (Article 195(1) of the Enforcement Decree). The order reversed the judgment below and remanded the case to the Seoul High Court.

Supreme Court Judgment 2020Da202616 rendered on 9 May 2024, while stating that the exceptions in Article 198 of the Enforcement Decree are exhaustively enumerated, held: "Even where a transaction does not fall within an exception prescribed in Article 198 of the Enforcement Decree of the Capital Markets Act, with respect to a type of transaction in which, viewed objectively, there is no possibility whatsoever of improper use of inside information, a court may exclude the application of Article 172(1) of the Capital Markets Act by treating it as not constituting a purchase or sale under that paragraph." It further held: "Where either the preceding transaction or the subsequent transaction falls within an exception to the application of the above provision, it is appropriate to hold that, absent special circumstances, the short-swing profit return provision of Article 172(1) of the Capital Markets Act does not apply."

In a case where, in joint management proceedings by creditor financial institutions under the former Corporate Restructuring Promotion Act, the main creditor bank, in order to maintain the listing, acquired shares through a debt-to-equity swap of its loans pursuant to the deliberation and resolution of the council of creditor financial institutions and then sold them, obtaining short-swing profits, the same judgment held that the lower court had committed no error, such as misapprehension of the law, in finding that a debt-to-equity swap effected as a debt readjustment pursuant to the council's deliberation and resolution for the purpose of restructuring or normalising the management of a company showing signs of insolvency constituted a type of transaction in which, viewed objectively, there was no possibility of using inside information, and that the return provision therefore could not apply. The order dismissed the appeal and ordered the plaintiff to bear the costs of the appeal.

Practical checklist

This section is not advice but a set of questions that may be asked when checking the records. First, status and period may be asked about. It can be established by date which of officer, employee subject to the return, or major shareholder the trader was at the time of each purchase and sale; if a major shareholder, whether the trader held that status at both times; and whether the purchase and sale took place within six months of each other.

Second, the matching of quantities may be asked about. A table can be prepared, following the method in Article 195 of the Enforcement Decree, showing the quantities purchased and sold within the six-month window, the result of matching them in order from the earliest where there were multiple trades, and whether the quantity held before the window affects the calculation.

Third, the basis for an exception may be asked about. It can be recorded separately, for each of the preceding and subsequent transactions, which subparagraph of Article 198 of the Enforcement Decree as in force at the time of the transaction it falls within, and, if none, on what basis the type of transaction can be regarded as one in which, objectively, there is no possibility whatsoever of improper use of inside information.

Fourth, discretion in the decision to transact may be asked about. It can be checked against resolutions and internal review documents whether the decision whether, when and on what terms to acquire was fixed by an external decision such as a statute, a council resolution or governmental guidance, and whether the party to the transaction had room to choose by weighing its economic interests. This is strictly a list of materials to be checked; the conclusion is for the reader.

Glossary

Short-swing profits is a term defined in Article 172(1), referring to profits obtained by an insider who sells specified securities, etc. within six months after buying them, or buys them within six months after selling them. The person entitled to claim the return is the corporation, and a shareholder may, subject to certain requirements, act by subrogation on behalf of the corporation.

Matched trading quantity is a term used in Article 195(1), subparagraph 1 of the Enforcement Decree, meaning the lesser of the quantity purchased and the quantity sold. The profits are calculated by multiplying the difference in unit prices by this quantity and then deducting commissions and taxes.

Major shareholder is a term defined in Article 2, subparagraph 6, item (b) of the Act on Corporate Governance of Financial Companies, referring to, among others, a person who owns 10/100 or more of the total number of issued voting shares. Under Article 172(6), paragraph (1) does not apply where the person was not a major shareholder at one of the two times, that of sale or that of purchase.

Exclusion by type is a term used in this brief to refer to the holding in 2020Da202616. It means a determination that excludes the application of the return provision not on the ground that information was not actually used in the individual transaction, but on the ground that, objectively, there is no possibility whatsoever of improper use of inside information in the type of transaction itself.

Sources and limitations

The sources for the provisions are the current texts on the Korea Law Information Center. Articles 9, 161, 172 and 174 of the Capital Markets Act are as in Act No. 21857 [effective 2 October 2026]; Articles 194, 195 and 198 of the Enforcement Decree of the same Act are as in Presidential Decree No. 36756 [effective 13 October 2026]; Article 2 of the Act on Corporate Governance of Financial Companies is as in Act No. 21065 [effective 2 January 2026]; Article 401-2 of the Commercial Act is as in Act No. 21044 [effective 10 September 2026]; and Article 23 of the Constitution of the Republic of Korea is as in the Constitution wholly amended on 29 October 1987. The date of checking was 16 October 2026.

The sources for the judgments are the issues, summaries of holdings and orders of the two judgments published on the Korea Law Information Center. The quoted summaries of holdings reproduce the original wording, and transaction quantities, amounts and the specific circumstances of the parties have not been set out beyond what appears in the summaries of holdings.

The texts of the Capital Markets Act and its Enforcement Decree as in force at the time of the transactions, the text of the former Corporate Restructuring Promotion Act, the full reasoning of the judgments, and the lower court judgments were not checked in this brief. Whether the subparagraphs of Article 198 of the Enforcement Decree had the same content at the time of the transactions must be checked separately.

Points left open

Article 198, subparagraph 13 of the current Enforcement Decree provides an exception for cases recognised by the Securities and Futures Commission as presenting no risk of the use of material non-public information. How this subparagraph fits with the holding in 2020Da202616 that a court may apply exclusion by type to a transaction not recognised by the Securities and Futures Commission remains an open question.

The scope of the types of transaction in which, viewed objectively, there is no possibility whatsoever of improper use of inside information also needs further clarification. Whether, besides debt-to-equity swaps, other transactions in restructuring processes, or transactions approaching statutory obligations, can be grouped into the same type is something that will emerge as cases accumulate.

There is also room to test, through worked calculations, what results follow when the interpretation that defines the scope of the return by the matched trading quantity, where shares held from before the six-month period exist, is combined with the matching order applicable to multiple trades. The summary of holdings does not illustrate the calculation method with concrete figures.

It also remains to be seen how procedural provisions, such as the two-year period in Article 172(5) and the shareholder's subrogation claim in paragraph (2), connect with the reasoning of the two judgments. The wider the scope of the liability to return profits, the weightier the questions of when the claim is made and who may make it may become in practice.

When to reconsider

This brief will be rewritten if Article 172 of the Capital Markets Act or Article 195 or 198 of its Enforcement Decree is amended, or if the Supreme Court renders a new decision on the scope of, and exceptions to, the return of short-swing profits.

In that event, the boundary between the scope of the return and its exceptions will be restated on the basis of the statutes in force at the time of the transactions, within the scope of what the issues and summaries of holdings of the two judgments and the new judgment state.

Statutes referred to

• 자본시장과 금융투자업에 관한 법률 제9조, 제161조, 제172조, 제174조
• 자본시장과 금융투자업에 관한 법률 시행령 제194조, 제195조, 제198조
• 금융회사의 지배구조에 관한 법률 제2조
• 상법 제401조의2
• 대한민국헌법 제23조

Decisions referred to

• 대법원 2023. 8. 31. 선고 2022다253724 판결 · Decision ledger
• 대법원 2024. 5. 9. 선고 2020다202616 판결 · Decision ledger

Verification status

The cited provisions (Articles 9, 161, 172 and 174 of the Financial Investment Services and Capital Markets Act; Articles 194, 195 and 198 of the Enforcement Decree of the same Act; Article 2 of the Act on Corporate Governance of Financial Companies; Article 401-2 of the Commercial Act; and Article 23 of the Constitution of the Republic of Korea) were checked against the current texts on the Korea Law Information Center on 16 October 2026. The cited judgments (Supreme Court Judgment 2022Da253724 rendered on 31 August 2023 and Supreme Court Judgment 2020Da202616 rendered on 9 May 2024) were checked against the issues, summaries of holdings and orders in the judgment texts on the Korea Law Information Center. The texts of the statutes in force at the time of the transactions and the full reasoning of the judgments were not checked.