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In response to the concerns raised by various stakeholders, the National Assembly and the government have been preparing legislation and policies that would protect the rights and interests of minority shareholders pertaining to restructurings of listed companies and strengthen relevant procedural requirements.
There has been increasing concerns from various stakeholders, such as minority shareholders, on the value and ratio calculations in mergers and other restructuring transactions. Notably, an active discussion took place last year on the need for legislative and policy change in response to argument that a listed company’s spinning off a major business operation vertically and subsequently listing the spun-off subsidiary as a separate company seriously infringe the interest of the minority shareholders of surviving company. In light of such demands and concerns, the scope of disclosure requirements related to governance restructurings have been expanded, and the regulations that would strengthen the procedural rules for restructuring transactions have been proposed.
Revisions to the Guidelines on Corporate Governance Disclosure for Listed Companies
The corporate governance disclosure system requires listed companies to disclose the status of their compliance with the core principles of corporate governance and explain any cases of non-compliance. The system previously only applied to companies listed on the KOSPI market with assets valued at or above KRW 2 trillion. However, from 2022, the scope of companies subject to the corporate governance disclosure system has been expanded to include KOSPI companies with assets valued at or above KRW 1 trillion (asset thresholds applied as of end of previous fiscal year on a consolidated basis). In consideration of recent market trends and concerns regarding listed company’s vertical spin-offs, the Financial Services Commission (the “FSC”) added a section specifying principles on shareholder protection in the case of governance/ownership structure changes in the Guidelines on Corporate Governance Disclosure for Listed Companies (the “Guidelines”) in March 2022.
Under the new principles, companies must find ways to protect shareholders, such as by gathering minority shareholders’ opinions and protecting the rights of dissenting shareholders, when engaging in activities that change the company’s governance/ownership structure or major businesses (i.e., mergers, business transfers, spin-offs, comprehensive stock exchanges or transfers). Companies must also provide their policy on shareholder protection measures in the disclosure report, and if they do not have such a policy, explain the reason for its absence with the future plans. If the company’s governance/ownership structure changes during the disclosure year or if the company has detailed plans regarding the change, the company must explain the policies they implemented to protect shareholders and their future plans for shareholder protection.
The revised Guidelines took effect on the day of the 2022 deadline for report submissions (end of May 2022). The Korea Exchange and Korea Corporate Governance Service will perform an inspection in the latter half of 2022 (June-September) based on the revised Guidelines, and impose sanctions such as designating a company as a non-compliant company, imposition of revision orders by the Korean Exchange and penalty points on the companies that are found to have falsified or omitted disclosure items.
In addition to revising the Guidelines, the FSC is also reviewing various policies for resolving issues that may arise in the process of listing spun-off subsidiaries, such as creating mechanisms for protecting the rights of shareholders who dissented to the listing of spun-off companies and adding substantive evaluations of companies’ efforts to communicate with shareholders in the listing review process.
Amendments to the Capital Markets Act to Strengthen Restructuring Regulations
Several proposed amendments to the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”) that would strengthen the protection of shareholders’ rights and procedural rules for mergers and spin-offs of listed companies are currently pending in the National Assembly.
- Grant appraisal rights to dissenting shareholders in the event of a spin-off of a listed companyThe current law grants appraisal rights to dissenting shareholders of listed companies only in the event of spin-off mergers and certain spin-offs (when the new spun-off entity is not listed), and does not recognize the appraisal right of dissenting shareholders in the case of vertical spin-offs. National Assembly Member Yong-Woo Lee (Democratic Party) and twelve others proposed an amendment to the Capital Markets Act (Bill No.14910) that also grants appraisal rights to shareholders who dissented to vertical spin-off of listed companies. This proposed amendment was submitted to the National Policy Committee of the National Assembly on March 22, 2022.
- Upon listing the spun-off subsidiary, allocate 50% or more of new shares to the shareholders of the surviving companyThe amendment to the Capital Markets Act proposed by National Assembly Member Yong-Woo Lee and thirteen others (Bill No.14931) establishes an exception where, when offering the shares of a subsidiary spun-off from a listed company in order to list that subsidiary on the securities exchange, 50% or more of the new shares must be allocated to minority shareholders of the parent company (i.e., the surviving company of the spin-off). This amendment was also submitted to the National Policy Committee of the National Assembly on March 22, 2022.
- Imposition of the burden of proof and liability for damages regarding the fairness of merger value calculations on listed companiesUnder current law, when listed companies engage in legal acts involving organization, such as mergers, the value of such acts must be calculated based on stock prices in the market. National Assembly Member Yong-Woo Lee and ten others proposed an amendment to the Capital Markets Act (Bill No.15401) which stipulates that (i) the value of a listed company applied in case of a merger must be calculated fairly based on market value but also take into account various factors such as asset value and profit value, (ii) the burden to prove the fairness of the calculated value is borne by the listed company, and (iii) the listed company and its directors, auditors, and external appraisal agencies are jointly and severally liable for damages in the event where investors suffer damages due to unfairly determined value of the merger. This amendment was submitted to the National Policy Committee of the National Assembly on April 27, 2022.
National Agenda Items Relating to Capital Market Innovation and Building Investor Confidence
President Yoon has pledged during his campaign that he would strictly limit the listings of spun-off subsidiaries and grant appraisal rights to shareholders of parent companies. The “110 national agenda items of the Yoon Administration” announced on May 3, 2022 includes a plan to prepare a specific task policy and regulatory reform to protect the rights of minority shareholders of the parent company in the event of the listing of a subsidiary created by spinning off a business operation.
Considering that shareholder protection in vertical spin-offs is explicitly stated in the national agenda item of the new administration, the various policies mentioned by the FSC (e.g., granting appraisal rights to shareholders who dissented to the listing of spun-off subsidiaries, strict listing review for spun-off subsidiaries) are likely to be implemented in the near future. The National Assembly will also likely legislate new laws and amend existing ones to establish a legal basis for such policies.
Expert Opinions on Strengthening Restructuring Regulations
On April 6, 2022 the Korea ESG Research Institute, which conducts research and evaluations on corporate governance and social responsibility, stated in its report that, despite the recent instances in which shareholders’ rights and interests were harmed during the restructurings of major listed Korean companies, no clear solutions have been implemented, leading to rising social costs. The report also suggested that when listed companies restructure through vertical spin-offs, they should grant appraisal rights to dissenting shareholders and return profits to shareholders, for example, by cancelling a certain amount of treasury shares even when the spin-off was considered necessary from a managerial standpoint – a position that supports the recent trend of strengthening restructuring regulations. Many expert organizations and civic groups are also actively voicing their opinions on the matter.
Mergers, spin-off mergers, and comprehensive stock transfers/exchanges between subsidiaries and listing spun-off business operations have widely been used as methods of restructuring the business and governance structures of corporate groups. Companies that are planning to make changes to their business and governance structures through such methods should monitor the ongoing changes in the regulatory and policy fields and note the precise effective dates for those changes. Moreover, companies should not only ensure compliance with the new laws and policies but also make adequate preparations in advance so that they can respond effectively to the various requests that stakeholders may make during the restructuring process.
Since these changes in policies are likely to have huge impact on restructurings, companies should also continue to monitor such developments as they arise.