Recent Regulatory Trends in Corporate Governance Restructuring Transactions

In 2024, the financial authorities amended the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”) and the Regulation on Securities Issuance and Disclosure (the “RSID”). These amendments aim to (i) protect the rights and interests of ordinary shareholders during corporate governance restructuring transactions, such as mergers and spin-offs, and (ii) better align domestic practices with global standards. The authorities plan to pursue similar regulatory reforms in 2025.

Reforms to the regulations governing corporate governance restructuring transactions (some of which have already been implemented and some of which are planned) can be broadly categorized into three main areas:

(i)	Mandating the board of directors to prepare a written opinion during corporate governance restructuring transactions, such as mergers, to protect the interests of ordinary shareholders. This also includes strengthening regulations related to the external valuation system;

(ii)	Tightening regulations related to treasury stock, including placing limitations on the allocation of new shares to treasury shares during mergers and spin-offs of listed companies, to prevent their misuse to enhance the control of major shareholders; and

(iii)

Strengthening review standards for re-listing of companies on the KOSPI market following a horizontal spin-off.

These regulatory reforms are anticipated to bring about significant changes to the operational aspects of corporate governance restructuring transactions, including mergers and spin-offs of listed companies. The following sections will analyze the key elements of the 2024 amendments to the Enforcement Decree of the FSCMA and RSID concerning corporate governance restructuring transactions. Additionally, we will explore the major reform proposals announced for 2025 and their potential impact.

Strengthening Procedures to Protect Interests of Ordinary Shareholders in Mergers and Other Corporate Governance Restructuring Transactions Involving Listed Companies

The amended Enforcement Decree of the FSCMA and the RSID, which took effect on November 26, 2024, primarily aim to enhance public disclosures during corporate governance restructuring transactions, improve the external valuation system and revise merger pricing regulations.

The main contents of the amended Enforcement Decree of the FSCMA and RSID include the following:

(1)

Requirements to Draft and Disclose Board of Directors’ Written Opinion

Under the amended Enforcement Decree of the FSCMA, when a listed company plans to merge with another entity, it must draft a written opinion of the board of directors that includes the board’s views on the merger’s purpose and anticipated effects, the merger price, the adequacy of the terms of the merger (including the merger ratio) and any dissenting opinions from directors regarding the merger. Additionally, the listed company must ensure that all directors affix their signature or seal to such written opinion. Apart from mergers, the foregoing requirements apply mutatis mutandis to acquisitions or transfers of significant businesses or assets, comprehensive stock exchanges, comprehensive stock transfers and spin-offs or spin-off mergers (collectively “Restructuring Transactions”).

Furthermore, in accordance with the amended RSID, the company must enclose the aforementioned written opinion with both the securities registration statement and the material fact report related to the Restructuring Transactions.

As a result of the requirements on the board of directors’ written opinion, the effects of Restructuring Transactions on companies’ finances, operations and management, as well as any dissenting opinions from directors, will be disclosed transparently and thoroughly. This level of disclosure aims to reduce information asymmetry in decision-making processes for Restructuring Transactions. Additionally, since the directors’ written opinions on Restructuring Transactions will be made public, it would be advisable to carefully assess the board’s perspectives on the necessity of Restructuring Transactions for business purposes and the adequacy of their terms.

(2)

Reform to Merger Pricing Regulations

The prior version of the Enforcement Decree of the FSCMA faced criticism for directly regulating merger pricing, thereby hindering businesses’ ability to restructure through autonomous negotiations. The amended Enforcement Decree imposes stricter disclosure requirements and mandates external valuations for mergers, while exempting mergers between non-affiliated companies from the merger pricing regulations. Consequently, non-affiliated parties are encouraged to substantively negotiate the merger ratio, which is a critical component of merger negotiations. If the directors’ fiduciary duty is expanded (currently under discussion), the expansion will necessitate a thorough prior review to ensure the reasonableness and appropriateness of directors’ decisions to proceed with a merger.

Mergers involving affiliated entities and Special Purpose Acquisition Companies (“SPACs”) will remain subject to the merger pricing regulations enumerated in the FSCMA. However, during a briefing session held on December 2, 2024, the Financial Services Commission (the “FSC”) announced plans to eliminate these merger pricing regulations, even for mergers between affiliates. This change would enable merger prices to be determined independently from a standardized formula, allowing for a more accurate reflection of the true value of the businesses involved. In light of the foregoing, it would be advisable to keep track of further developments and the progress on this reform.

(3)

Improvement of External Valuation System

The prior version of the Enforcement Decree of the FSCMA was criticized for lacking regulations regarding external valuation agencies, leading to challenges in ensuring the fairness and reliability of valuation results. To address this problem, the amended Enforcement Decree of the FSCMA mandates that an external valuation agency appraise the appropriateness of the merger price in the case of a merger between non-affiliates of a listed company (which would not be subject to the merger pricing regulations). It also mandates that the listed company obtain its auditor’s consent for the selection of an external valuation agency (or, if the company has an audit committee, a resolution from the audit committee) in the case of a merger between affiliates of a listed company.

In addition, the amended Enforcement Decree of the FSCMA requires external valuation agencies to establish quality control regulations for its external valuation process (“Quality Control Regulations”), which would have to be complied with when carrying out tasks in relation to mergers, in order to ensure objective and effective external valuations. Furthermore, the amended RSID prohibits an external valuation agency from simultaneously engaging in the calculation of merger prices and valuation activities.

The strengthened regulations governing external valuation agencies are expected to improve the objectivity and neutrality of external valuation results during the process of Restructuring Transactions, as well as reduce information asymmetry.

Restrictions on Allocation of New Shares to Treasury Stock in Mergers, Spin-Offs or Spin-Off Mergers of Listed Companies

The prior version of the FSCMA lacked clear provisions regarding the allocation of new shares to the treasury shares of the spun-off entity during a horizontal spin-off of a listed company, as well as the allocation of new shares to shares of the non-surviving company held by either the surviving or non-surviving company during a merger. However, new shares have been allocated to treasury shares based on authoritative rulings and established practices during horizontal spin-off and merger processes.

The amended Enforcement Decree of the FSCMA, effective as of December 31, 2024, clearly stipulates that in the event of a merger of a listed company, the surviving entity is prohibited from allocating new shares to (i) the existing shares of the non-surviving company it holds, or (ii) the non-surviving company’s treasury shares, as well as from transferring treasury shares as merger consideration. Under the amended Enforcement Decree, in the event of a spin-off or spin-off merger of a listed company, the newly established company resulting from a simple split or spin-off merger, as well as any successor company, is prohibited from allocating new shares to the treasury shares held by the original company in the spin-off. Likewise, the original company is not permitted to transfer its treasury shares to the newly established entities resulting from a simple split or spin-off merger, or to the successor company.

These restrictions are expected to prevent major shareholders from misusing treasury stock to reinforce their control during the horizontal spin-off process of listed companies and better align domestic practices with global standards. However, despite these new provisions, uncertainties remain, including whether the restrictions on the allocation of new shares during a horizontal spin-off process would also apply to treasury shares entrusted by a listed company for the purpose of issuing exchangeable bonds.

Stricter Review of Surviving Entity for Potential Re-Listing After Spin-Off of Companies Listed on KOSPI Market

Unlike a horizontal spin-off of a listed company on the KOSDAQ market, for a horizontal spin-off of a listed company on the KOSPI market, there is no explicit legal basis for separate requirements and review processes for the surviving company during the re-listing of the newly established spun-off entity. This lack of regulatory clarity may allow the original company to exploit the situation by transferring blue-chip lines of business to the new entity during the re-listing process, potentially increasing the vulnerability of the surviving company.

In response, in a press release issued on January 21, 2025, the Financial Supervisory Service announced plans to amend the KOSPI Listing Regulations of the Korea Exchange (the “KRX”). Under the proposed amendment, a surviving company that fails to meet minimum requirements for re-listing after a horizontal spin-off of a listed company on the KOSPI market will be additionally subject to substantive reviews. According to the press release, the minimum criteria for a surviving company will be set based on equity capital, sales and net profit for the relevant year, similar to the KOSDAQ Market Listing Regulations. However, the thresholds for meeting these requirements are expected to be higher for the KOSPI market, reflecting market differences.

On April 3, 2024, the KRX amended the Enforcement Rules of the KOSPI Listing Regulations. This amendment requires the KRX to assess whether a newly established company from a spin-off or a surviving company seeking re-listing has adequately prepared measures to protect the rights and interests of ordinary shareholders. Measures may include collecting shareholders’ opinions, communicating with them, establishing a dividend policy and planning for treasury stock buybacks. Any surviving company that does not meet the minimum requirements may additionally face substantive reviews. It is anticipated that regulations will be tightened for listing review processes for companies that intend to go public on the KOSPI market following a horizontal spin-off.

In light of such regulatory changes, we recommend listed companies to thoroughly review and understand the new regulations and adhere to enhanced procedures when engaging in corporate governance restructuring transactions, including mergers. Recently, several companies announced corporate governance restructuring transactions but subsequently withdrew in response to market backlash and increased scrutiny from regulatory authorities. Companies planning corporate governance restructuring transactions should gather input from diverse stakeholders and establish clear investor protection measures before proceeding with restructuring activities.

On January 8, 2025, the FSC unveiled its Key Implementation Plan for 2025. This plan includes strategies to strengthen corporate governance through the introduction of a mandatory tender offer system and a requirement to protect the fair interests of shareholders during mergers and spin-offs. Additionally, a bill proposing to amend the FSCMA, has been submitted to the National Assembly (proposed by National Assembly Member Jeong-Moon Lee and others on February 12, 2025), and remains pending. Such bill mandates that relevant companies (i) conduct fair valuations to determine merger prices, (ii) hold the company and its management jointly liable for compensation caused by unfairly determined merger prices, and (iii) prioritize allocating at least 35% of total shares to existing shareholders when a newly established entity from a spin-off is listed on the stock market. The FSC is expected to continue discussions and push for regulatory reforms aimed at protecting the interests of ordinary shareholders during corporate governance restructuring transactions.

Both corporate entities contemplating corporate governance restructuring transactions and market participants, including shareholders, are strongly advised to take into account key details and developments in regulatory reforms related to corporate governance restructuring.

[Korean Version]

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