On July 14, 2022, the Financial Service Commission (the "FSC") held a policy seminar on certain shareholder protection measures to apply upon the listing of split-off subsidiaries. The seminar also unveiled specific policy tasks that FSC intends to pursue. This follows the FSC’s earlier policy seminar on June 17, 2022 which covered certain capital markets policy tasks relating to shareholder protection measures focusing on enhanced investor protection measures in the stock market.
Strengthened disclosure requirements: It will become mandatory to disclose corporate restructuring and shareholder protection plans as part of a listing plan when pursuing a vertical spin-off of a subsidiary.
- This purports to furnish sufficient information to shareholders to enable them to make informed decisions at the general meeting of shareholders when approving the spin-off, etc.
Listing review: When a vertically split-off subsidiary is listed within five years of incorporation, restrictions will be imposed on the listing if, in light of the totality of the circumstances, the parent company is found to have failed to have sufficiently communicated with its general shareholders.
- Examples of insufficient efforts to implement shareholder protection measures include (i) failure to publicly disclose a shareholder protection policy, (ii) failure to properly implement a publicly disclosed shareholder protection policy, and (iii) failure to fairly assess and address concerns raised by general shareholders.
Appraisal rights to demand share repurchase: Shareholders who are opposed to the spin-off but whose voices are excluded from the decision-making will be given a right to demand the purchase of their shares.
Preferential allocation of new shares: The FSC will weigh the pros and cons and practical consequences and decide, in consultation with other competent ministries (the Ministry of Justice), whether to require preferential allocation of new shares to shareholders of the parent company of a vertically split-off subsidiary.
- Issues the FSC will consider include (i) identifying the parent company shareholders who are entitled to protection, (ii) compatibility with the Commercial Code’s principle governing the allocation of new shares, and (iii) the heightened volatility of a parent company’s share price prior to the listing of a subsidiary.
Based on feedback that it received during its policy seminars, and upon conferring with the Ministry of Justice and other relevant authorities, the FSC plans to announce a policy improvement plan by the third quarter of this year.
As explained in our March 18 newsletter (link), during the election, the President pledged to protect minority shareholders of a parent company when a subsidiary is listed following a vertical spin-off (this was replicated in the transition committee’s policy handbook). At the July 14 policy seminar, the FSC appears to have set specific deadlines for the examination and implementation of such pledge.
For your information, on March 23, 2022, Congressman Lee Yong Woo proposed a partial amendment to the Financial Investment Services and Capital Markets Act introducing a requirement that at least 1/2 of the shares issued in the listing of a split-off company be allocated to minority shareholders of the existing company on a preferential basis (Article 165-6 of the bill).
As many as 110 publicly traded companies have reportedly undergone a spin-off since 2020. The FSC’s new policy may affect businesses contemplating a vertical spin-off of a key business unit as well as businesses that have already undergone a vertical spin-off and are getting ready for listing. Going further, the new policy may also apply to subsidiaries formed in a manner similar to a vertical spin-off in substance (e.g., in-kind contribution or business transfer). As such, the new policy could have a significant impact on all stakeholders in the listing of a subsidiary, including businesses, shareholders and investors. Particular attention should be paid to further developments and implications of the contemplated policy changes when structuring and planning capital raising through a spin-off or listing of business units.