Further to the seminar held in July (see our July newsletter (link), on September 5, 2022, the Financial Services Commission (FSC) announced its “Plans for Improved Protection of General Shareholders’ Rights When Listing Spun-off Subsidiaries” (link). The announcement reaffirms FSC’s resolve to implement reforms in the areas that they identified in July, specifically for (i) stronger listing disclosure requirements, (ii) stricter listing reviews when listing a spun-off subsidiary within 5 years of incorporation, (iii) grant of appraisal rights to dissenting shareholders and (iv) certain mandatory preferential share allocations, each aimed at better protecting shareholder’s rights in relation to the listing of spun-off subsidiaries.
The recent announcement proposes 3 major areas of reform and pre-announced the amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA-ED). The Corporate Disclosure Form Preparation Standards and the Listing Guidebook will be updated by October and all procedures necessary to amend the related laws and regulations are expected to be completed by the end of 2022.
Major Proposed Amendments
1. Appraisal rights to dissenting shareholders1
Shareholders who oppose the vertical split-off of a listed company will be granted appraisal rights to assign the shares of the listed company at the trading price of the shares prior to the board approval and disclosure of the contemplated split-off plan2. By comparison, currently, appraisal rights are granted to only dissenting shareholders in case a listed company implements horizontal split-off and the newly incorporated spun-off company is not a listed company. The proposed amendments to the FSCMA-ED will take effect from the date of promulgation and apply at the time when the board of directors resolves to hold a general meeting of shareholders for approval of the split-off according to Article 530-3 and Article 530-12 of the Korean Commercial Code (KCC).
2. Mandatory disclosure of specific purposes of vertical split-off (restructuring, sale, listing, etc.), anticipated impact, and general shareholders protection measurements and changes to mandatory reporting3
Article 12-8-7 (In case of Vertical Split-off, Review of Split-off Implementation)
3. Restrictions on the listing of a vertically spun-off subsidiary within 5 years of incorporation4
The listing of a company may be restricted (i) if the listing is pursued within 5 years of incorporation and even if the vertical split-off was completed prior to the amendment of the Listing Regulations (ii) to the extent the parent company is found to have failed to make sufficient efforts to protect its general shareholders (e.g., collecting opinions from shareholders and sufficiently communicating with them). An exception will be granted if certain changes are made to the parent company or the key business units of the spun-off subsidiary.
See below for specific examples of shareholder protection measures. Instances of insufficient shareholder protection will be set out in the KRX’s Listing Guidebook.
Reference: Examples of Shareholder Protection Measures
On the subject of granting preferred allocation rights to the shareholders of the parent company for new shares in a spun-off subsidiary upon the listing of the subsidiary, FSC intends to conduct a mid- to long-term review as the KCC permits preferential allocation of new shares to third parties only in extremely limited circumstances and there were opinions from experts recognizing the practical difficulty in identifying the particular shareholders subject to such preferred allocation.
The proposed amendments are expected to exert a significant impact on any listed company who is contemplating a split-off of a business unit into a subsidiary, listed or to be listed in Korea. It may have to procure funds to pay out a dissenting shareholder if it exercises its appraisal rights and address the added layer of mandatory disclosures on their Reports on Major Facts. Even a business transfer through in-kind contribution of a business unit may grant appraisal rights to dissenting shareholders under the KCC or the FSCMA and trigger additional mandatory disclosure requirements. There will also be restrictions on listing a vertically spun-off subsidiary within 5 year of incorporation of the subsidiary.
1 Covered in the proposed amendment to FSCMA-ED, Article 176-7(1) pre-announced on September 5, 2022; anticipated enforcement date is January 2023.
2 Covered in the proposed amendment to FSCMA-ED, Article 176-7, Paragraph (1).
3 To be covered in the update to the Corporate Disclosure Form Preparation Standards for mandatory reports on Major Facts expected in October 2022.
4 To be covered in the amendments to the Enforcement Rules of KOSPI and KOSDAQ Market Listing Regulations and the Listing Guidebook expected in October 2022.