On December 2, 2024, the government held a press conference led by the Financial Services Commission (“FSC”). Attendees included Kim Byoung Hwan, Chairman of the FSC, Koo Sang-Yeop, Head of the Legal Affairs Bureau at the Ministry of Justice, and Lee Se Hoon, Senior Deputy Governor of the Financial Supervisory Service. During the conference, the government announced plans to revise the Financial Investment Services and Capital Markets Act (referred to as the “FSCMA”), with the aim of enhancing the protection of general shareholders’ interests.

This has captured market attention as it represents the government’s official alternative to the proposed amendment to the Korean Commercial Code, which includes the introduction of a general duty of loyalty for directors towards shareholders, which was endorsed by the Democratic Party of Korea (Link).

At the press conference, FSC Chairman Kim Byoung Hwan stated, “To minimize the negative effects that revising the Korean Commercial Code might have on numerous unlisted small and medium-sized enterprises as well as mid-tier companies, we have limited its application to listed corporations.” He further explained that the amendment of the FSCMA is being pursued because “by explicitly including measures to protect shareholders in financial transactions within the FSCMA, we can alleviate the uncertainties in day-to-day management activities that might arise from the revision of the Korean Commercial Code.”

Koo Sang-Yeop, Head of the Legal Affairs Bureau at the Ministry of Justice, stated that the amendment bill was the outcome of discussions among various ministries. He explained, “This government-prepared amendment bill offers shareholders a practical mechanism to legally hold companies and their boards of directors accountable. Additionally, companies and directors can enhance the predictability of liability exemptions by ensuring that there are adequate grounds for their decision-making.”

The key points of the bill include the following:
 

• This bill mandates that when a listed company undertakes activities such as mergers, acquisitions of significant businesses or assets, comprehensive exchanges or transfers of stocks, or spin-offs and spin-off mergers (hereinafter collectively “Corporate Restructuring”), the board of directors must prepare and disclose a written opinion regarding the purpose, anticipated effects, and fairness of the transaction’s price of the Corporate Restructuring. Additionally, the board must endeavor to protect shareholders’ legitimate interests.

• The bill further aims to establish guidelines on shareholder protection efforts, which will include the preparation and disclosure of the board of directors’ written opinion. These guidelines will be developed in collaboration with pertinent ministries and will outline a code of conduct for management.

• By fostering an environment where the board of directors actively considers and transparently communicates on shareholder interests during Corporate Restructuring and other activities involving capital transactions, this bill seeks to strengthen shareholder protection.
   

• This bill seeks to enhance the regulations governing the calculation of the merger ratio in the event of a listed company’s Corporate Restructuring, specifically moving away from a uniform approach based solely on current stock prices. Under this bill, the merger ratio must be determined at a fair value that comprehensively considers various factors, including stock price, asset value, and earnings value, thereby reflecting the true value of the company.

• It is noteworthy that similar regulations applicable to Corporate Restructuring between non-affiliated companies have been incorporated into the Enforcement Decree of the FSCMA and have been in effect since November 26, 2024.
   

• The current FSCMA does not mandate external evaluation and disclosure for Corporate Restructuring between listed affiliates. In contrast, the proposed bill will generally require every Corporate Restructuring of listed companies to undergo evaluation and disclosure by an external evaluation agency.

• This change aims to enhance the objectivity and neutrality in determining merger consideration and to reduce information asymmetry.
   

• This bill offers the common shareholders of a parent company the opportunity to benefit from the value of promising business divisions following a vertical spin-off.
   

• The 2022 reform of regulations concerning the listing of subsidiaries following vertical spin-offs requires that the Korea Exchange review the measures implemented to protect its general shareholders, if a subsidiary is listed within five years after a vertical spin-off; if the Korea Exchange determines that such measures are inadequate, it may restrict the listing. This bill aims to enhance shareholder protection by removing the above five-year limitation period (through the revision of the Korea Exchange’s rules). This change will enable listed companies to undertake proper protection efforts for the parent company’s shareholders without a time constraint.

• The same rigorous qualitative review will be applied to other types of corporate divisions achieved through business transfers and in-kind contributions, particularly if they might potentially bypass the regulations on vertical spin-offs.
   

The government plans to consult the Ruling Party, and incorporate the key points mentioned above, before submitting the bill to amend the FSCMA as legislative initiative led by members of the National Assembly. The FSC Chairman Kim Byoung Hwan stated, “The government shares the goal of protecting ordinary shareholders and has been actively revising the law to achieve this.” He added, “We aim to communicate to investors that the amendment will significantly reduce market concerns and seek their understanding.”

The proposal to introduce a general duty of loyalty for directors to shareholders was put forward to address concerns and reflect considerations related to corporate restructuring, including mergers and spin-offs, the allocation of control premiums to minority shareholders during majority stake acquisitions, and various treasury stock transactions intended to protect management’s control over the company. Given this context, some argue that instead of amending the broad duty of loyalty regulations, it may be more effective to introduce specific regulations to prevent potential conflicts of interest and shareholder harm by directors in certain situations like those mentioned. Proponents of this approach caution that revising broad and abstract regulations governing directors’ duties may lead to unforeseen changes and uncertainty across the entire corporate law framework.

The government’s announcement of this alternative seems to align with this perspective. The market is taking note that this bill represents a collective governmental effort through discussions among all relevant departments, rather than being the initiative of an individual ministry. Once enacted, the amendment will bring about significant changes in regulations related to the structure, terms, and disclosure of transactions such as mergers of listed companies, acquisitions of major businesses and assets, comprehensive stock exchanges and transfers, spin-offs, and spin-off mergers. It is crucial to stay informed about these changes. Moreover, the Korea Exchange will strengthen regulations related to subsidiary listing after a vertical spin-off of a major business division, as well as those related to comparable business transfers of major business divisions, or establishing or listing a subsidiary through capital contribution in kind. Measures to protect shareholder interests, like allocating new shares to general shareholders of the parent company, will be possible. It is noteworthy that flexible interest adjustments are being considered rather than outright prohibitions.

[Korean Version]