The Government and supervisory authorities have recently held discussions on various forms of system improvement in corporate governance restructuring transactions. The system improvement efforts could largely be classified into (i) discussions related to prevention of abuse of corporate governance restructuring transactions as a means to expand the control of major shareholders, and (ii) discussions related to protection of the rights and interests of minority shareholders and general investors in corporate governance restructuring transactions.
On prevention of corporate governance restructuring transactions from being abused as a means to expand major shareholders’ control expansion, discussions revolved around (i) system reform related to treasury stocks, including restricting the allotment of new stocks for treasury stocks during the spin-off process of listed companies, and (ii) the strengthening of disclosure standards when awarding stocks to officers or major shareholders.
On protection of the rights of minority shareholders and general investors, discussions related to the following have taken place: (i) the implementation of a prior disclosure rule, effective from July 2024, for stock trading by listed company officers and major shareholders, (ii) an amendment of the Financial Investment Services and Capital Markets Act (the “FSCMA”) to strengthen governance restructuring transaction-related disclosure requirements and improve the external valuation system, and (iii) the introduction of a system to expand dissenting shareholders’ appraisal rights to include unlisted companies’ split-offs through an amendment of the Korean Commercial Code, among others.
Specifically, the following are the key details of regulations that are currently pending enactment or are being discussed by the Government or supervisory authorities:
1. |
Prevention of Corporate Governance Restructuring Transactions From Being Abused as Means to Expand Major Shareholders’ Control |
(1) |
Improvement of systems in relation to listed companies’ treasury stock |
(2) |
Requirement to indicate utilization of stock awards (share-based payments) by officers and employees in business reports |
2. |
Protection of Minor Shareholders and General Investors’ Rights and Interests |
(1) |
Amendment to the FSCMA in relation to prior disclosure rule on listed company insiders’ stock trading
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(2) |
FSC’s meeting on M&A system improvement
It is understood that the above-mentioned improvement measures would be applied not only to merger transactions, but also to other governance reform transactions (i.e., split-off, split-off with merger, comprehensive exchange/transfer of stocks, transfer of important businesses or assets). The FSC aims to have the proposed amendments of the Enforcement Decree of the FSCMA and the Issuance Disclosure Regulations enacted in the third quarter of 2024, after the pre-announcement of the legislation by April 15, 2024, examination by the Ministry of Government Legislation, and resolution by the State Council. |
(3) |
Discussions to amend the Korean Commercial Code to protect minority shareholders’ rights and interests |
Specifically in relation to dissenting shareholders’ appraisal rights in split-offs, the Ministry of Justice’s proposed partial amendment to the Korean Commercial Code (the legislation was pre-announced in 2023) also included a provision whereby “if the total amount of assets being transferred by a company subject to a spin-off pursuant to a vertical spin-off or vertical spin-off with merger exceeds 10% of the total asset amount of the company subject to a vertical spin-off or vertical spin-off with merger prior to the vertical spin-off or vertical spin-off with merger, relevant dissenting shareholders would be granted appraisal rights.” At the time of the pre-announcement of legislation, the Ministry of Justice announced that it was proceeding with relevant procedures to enforce the proposed amendment to the Korean Commercial Code in 2024. Accordingly, we advise companies contemplating corporate governance restructuring transactions, such as spin-offs and spin-offs with mergers, to keep abreast of the result of the examination by the National Assembly’s plenary session and the subsequent promulgation of relevant laws and regulations.
Discussions regarding the foregoing measures for system improvement are expected to continue, aiming to prevent system abuse for the purpose of expanding major shareholders’ control, and to protect the rights and interests of minority shareholders and general investors.