Financial Authorities Move to Strengthen Regulation of Corporate Restructuring

As companies have recently been seeking various business activities to restructure their corporate governance and business structures, there is a growing interest in the protection of shareholders and investors.  As a result, legal procedures related to corporate management and regulations on related disclosures have been strengthened.

The regulatory changes mainly aim to (i) establish legal mechanisms to protect the rights and interests of shareholders and investors, and (ii) strengthen companies’ disclosure requirements concerning legal actions involving reorganization, such as spin-offs, mergers, as well as management activities, including the issuance of class stocks and equity related securities.

1.   Strengthened Regulations of Vertical Spin-offs of Listed Companies

On September 5, 2022, the Financial Services Commission (the “FSC”) published its Plan to Strengthen the Rights and Interests of Shareholders Associated with the Listing of Vertical Spin-off Subsidiaries (the “Plan”).  The Plan consists of the following measures: (i) strengthening of disclosure requirements for vertical spin-offs, (ii) granting appraisal rights to dissenting shareholders in vertical spin-offs of listed companies, and (iii) imposing heightened scrutiny in the review of listings of vertical spin-off subsidiaries.

These measures attempt to address the criticisms that have been raised against vertical spin-offs.  Vertical spin-off has long been used by companies to reorganize their corporate structure.  However, unlike in horizontal spin-offs, shareholders of the company engaging in a vertical spin-off do not receive shares in the new entity being established.  Moreover, there has been criticism that when the vertically spun-off entity goes public, its value is not fully reflected in the share value of the parent company, which undermines the interests of the parent company’s minority shareholders.

To enforce the aforementioned measures, the following changes have also been implemented:

• An amendment to the Guideline on Preparation of Corporate Disclosure Forms became effective as of October 18, 2022.  Under this amendment, companies planning to carry out vertical spin-offs must state the listing plan for the entity to be vertically spun-off, the purpose and effect of the vertical spin-off, and the company’s plan for shareholder protection on disclosure forms.
• An amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”), which establishes dissenting shareholders’ appraisal right in the event of a vertical spin-off of a listed company, is expected to become effective in January 2023.  The FSC announced that it will prepare follow-up measures to the amendment, which are expected to take effect in early 2023.  Under the amendment, the appraisal right will be granted upon the first resolution by the board of directors in which the board votes to obtain approval for a vertical spin-off at the general shareholders’ meeting.
• On September 26 and September 27, 2022, the Korea Exchange amended the Rules of the KOSPI Market Listing Regulations and the Rules of the KOSDAQ Market Listing Regulations, respectively.  Under these amendments, a vertically spun-off entity attempting to initiate the listing process within five years of the spin-off must go through a strict evaluation of whether the parent company has faithfully engaged in shareholder protection measures.

2.  Strengthened Disclosure Requirements for Mergers and Issuance of Class Stocks/Equity-related Securities

On September 29, 2022, the Financial Supervisory Service (the “FSS”) enacted an amendment to the Guideline on Preparation of Corporate Disclosure Forms, which expanded and specified disclosure requirements regarding restructuring activities and class stocks/equity-related securities:

• If a company undergoing restructuring (including a spin-off, business transfer, asset transfer, comprehensive share swap or transfer) does not state key financial details related to the restructuring on disclosure forms such as regular reports, securities registration forms, and prospectus, the company must specify the reason for such omission (e.g., the company did not undergo external valuation).
• When describing the status of the issuance of class stocks on regular reports, securities registration forms and prospectus, the company must also include information about the holders that exercised redemption or conversion rights, as well as details of exercising such rights.
• When preparing a report on key matters that is disclosed in the event of a private placement of equity-linked bonds (i.e., convertible bonds, bonds with warrants, and exchangeable bonds), the company must disclose details of the status and expenditure for each procured fund.

These amendments will allow shareholders and investors to access a variety of information, including post-merger information, information about the class stocks redemption/conversion rights, and the purpose of financing equity-related securities.

3.  Legislative Amendments Regarding Restructuring Within Companies

In order to protect the rights and interests of shareholders in relation to corporate activities and transactions that can alter the corporate governance structure, the following legislative amendments have been proposed and are pending before the National Assembly:

• Amendments to the FSCMA that concern, respectively, (i) preferential allotment of newly issued shares upon the listing of a vertical spin-off entity (submitted to the National Policy Committee of the National Assembly on May 17, 2022) and (ii) improving the fairness of the merger price of listed companies (submitted to the National Policy Committee of the National Assembly on September 20, 2022).  Please refer to our June 24, 2022 newsletter for details about these amendments to the FSCMA (Link).
• Amendment to the FSCMA stipulating that when dissenting shareholders of a listed company exercise their appraisal right, the share purchase price shall be calculated based on the weighted average of the asset and earnings values rather than on the stock price (proposed by Rep. Yong-woo Lee on September 19, 2022 and submitted to the National Policy Committee of the National Assembly on November 8, 2022).
• Amendment to the Commercial Code that recognizes the appraisal right of dissenting shareholders in the event of vertical spin-off of a joint stock company (listed or unlisted) (proposed by Rep. Hye-ryun Baek on October 11, 2022 and submitted to the Legislation and Judiciary Committee of the National Assembly on October 12, 2022).

Companies planning to improve their management are advised to strive to accurately understand the new regulations and closely monitor the direction of the changes.  Furthermore, it is necessary to prepare to effectively respond to various stakeholders’ complaints and requests that may arise under the tightened regulations.

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