On May 10, President Yoon Suk-yeol took office as the 20th President of the Republic of Korea. In line with the new government's corporate governance and capital market policies, relevant regulations are expected to change. Timely strategic responses from businesses will thus become more important.
We have reviewed President Yoon Suk-yeol's key campaign pledges regarding the corporate governance and capital market, and analyzed the post-inauguration prospects for regulations in these areas as well as the likely direction of responses from listed companies.
1. Revision of Regulations on Related Parties
As a presidential candidate, Yoon had pledged to improve the current regulatory system governing related parties, which forms the core set of laws and regulations for stakeholder transactions and conflicts of interest. There will also be reasonable adjustments to the defined scope of relatives, recognizing exceptions in cases with no joint economic relationships. On May 3, 2022, the Presidential Transition Committee (the "Committee") unveiled its plan to adjust the scope of relatives by announcing "Yoon Suk-yeol Administration's 110 National Agenda" (the "National Agenda"). The National Agenda indicates an on-going discussion to reduce the currently defined scope of relatives from "spouse and persons related within the sixth degree of consanguinity and within the fourth degree of affinity," to "spouse, persons related within the fourth degree of consanguinity and within the third degree of affinity."
If the Monopoly Regulation and Fair Trade Act (the "FTL"), the Korean Commercial Code (the "KCC") and other applicable laws and regulations are amended in accordance with such policy, we anticipate that regulations on related persons of listed companies will be changed to allow companies to more reasonably and efficiently manage their businesses.
2. Introduction of a Takeover Defense System
As a candidate, Yoon had pledged to introduce advanced measures to defend management control, such as the multiple voting right system for venture businesses, as a way for venture business founders to attract investments without diminished control and to ensure stable management control. On April 26, 2022, the Committee announced its plan to introduce the multiple voting right system, which had been long-desired by the venture industry.
Introduction of such a system will make it unnecessary for listed companies to commit their resources, such as treasury stock or circular shareholding, to defend management control. As a result, companies can more efficiently manage their resources by using their cash instead for facility investments or compensation for officers and employees.
3. Improvement of Regulations on Listing After a Spin-off
Yoon had pledged to protect minority shareholders by strengthening requirements for vertical spin-offs and institutionalizing shareholder protection measures, and the National Agenda included these proposed regulatory amendments.
More specifically, the regulatory system will be reorganized to ensure that rights of existing minority shareholders of the parent company are not infringed upon when a business is listed as a separate company after a spin-off. In case of a spin-off, the parent company's existing shareholders will be granted a preemptive right to subscribe to a certain percentage of new shares at the public offering price when subscribing to a subsidiary’s public offering shares.
Such reorganization would require amendments to the Financial Investment Services and Capital Markets Act (the "FSCMA") and the KCC to reorganize the basic laws and regulations regulating issuance of securities (such as flexible issuance of naked warrants). Therefore, we note that listed companies' strategies for capital raising and financial structure may change eventually.
4. Improvement of Regulations on Sale of Shares by Management and Major Shareholders
Yoon had pledged to restrict the sale of large number of shares by insiders, including the Company's management. The Yoon Administration will improve the relevant regime to ensure that ordinary shareholders do not suffer any damages from insiders' large volume sale, as well as to introduce period and amount limitations to such sales. According to the National Agenda Implementation Plan announced by the Committee, the new Administration will introduce an "unlimited insider stake sale restriction system" that requires any insider selling his/her shares to disclose their disposal plans. This new system seems to have taken into account wide criticisms from investors over the recent massive sale of stock option shares by the management of large listed companies, which had led to a drop in stock prices.
Last but not least, the new Administration is also expected to introduce various policies to (i) revise and improve the delisting requirements, (ii) expand the phased management system for the delisting process, (iii) root out illegal short selling, (iv) improve the rational operation of the short selling system, (v) improve transparency and fairness in the capital market, and (vi) strengthen ESG policies. Based on these key pledges, we anticipate a large number of changes will be implemented to the corporate governance and capital market regulations, appraisal rights systems and ESG management regulations. Therefore, we advise listed companies to stay vigilant and strategically prepare for these changes in the market.