In 2019, the Financial Services Commission (the “FSC”) allowed the trading of a fraction of a stock that is less than one whole share with respect to foreign stocks as part of its introduction of innovative financial services. As for domestic stocks, it has been understood that such fractional trading of domestic stocks was impossible due to the principle of indivisibility of shares under the Korean Commercial Act. However, on September 13, 2021, the FSC, the Korea Securities Depository (the “KSD”) and the Korea Financial Investment Association issued a press release announcing a plan to allow fractional trading of domestically listed stocks (link). Please see below for the key details of the plan.
1. Fractional Trading of Domestic Stocks
According to the press release, fractional trading of domestic stocks will occur as follows:
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a securities company acting as the broker for fractional trading would collect fractional trading orders from individual investors (thereby forming orders for whole shares) and submit bid prices to the Korea Exchange (KRX);
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the securities company would entrust whole shares with the KSD (as a custodian), which in turn would issue beneficiary certificates representing the fraction of shares entrusted by the securities company; and
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once orders are executed and payments are made, beneficiary certificates would be provided to investors.
2. Exercise of Shareholders’ Rights by Investors in Fraction of Shares
As for shareholders’ rights, investors in fraction of shares will be guaranteed economic benefits such as the right to cash and stock dividends in proportion to the beneficiary certificates provided to them by the KSD. However, exercise of voting rights is not permitted for investors in fraction of shares and the KSD will exercise voting rights for entrusted shares on their behalf (Article 112 (1) of the Financial Investment Services and Capital Market Act (the “FSCMA”) to be applied).
Moreover, investors in fraction of shares having beneficiary certificates for multiple fractional shares and holding one or more whole shares in aggregate may have their fractional shares converted into whole shares and exercise their voting rights pursuant to the terms agreed with the securities company.
3. Implementation Period
According to the FSC, fractional trading is scheduled for designation and implementation as an innovative financial service sometime during the third quarter of next year, without any immediate changes made to the FSCMA. In the longer run, however, the relevant provisions of the FSCMA are expected to undergo amendment to allow more permanent implementation.
Once fractional trading of domestic shares is permitted, the proportion of shares held by minority shareholders will increase along with the increase in the amount of investments by small / individual investors. Accordingly, the KSD’s exercise of voting rights representing such shareholders will be more important. Therefore, it would be advisable for companies to prepare appropriate responses with respect to areas such as investor relations. It might be possible for various policy development efforts to be made in order to improve and guarantee the rights of investors in fraction of shares, such as officially adopting the fractional share regime in the area of corporate and securities regulations as with Japan’s trading unit shares system.
Related Topics
#Fractional Trading #Corporate Governance #Capital Markets #Legal Update