I. Regulations of Refixing & Call Options for (Redeemable) Convertible Preferred Shares Issued by Listed Companies
As noted previously, the Financial Services Commission (“FSC”) amended the “Regulations on Issuance and Disclosure of Securities” on October 27, 2021, to prevent the misuse of convertible bonds for unfair trade practices, such as increasing majority shareholder’s shareholding ratio by circumventing the law, and these amendments went into effect on December 1, 2021 (Link). More specifically, the amendments (a) placed a limit on purchase options (call options) for convertible bonds, or bonds with warrants that are issued by listed companies, and (b) imposed an obligation to add an upward adjustment option as well for convertible bonds issued by private placement with an option to adjust the conversion price downwards (i.e., refixing).
Following the implementation of the above-referenced regulatory amendments, the FSC determined that there existed an issue with regulatory consistency as applicable to other equity-linked securities, and announced on September 7, 2022, that it would apply the same regulations to (redeemable) convertible preferred shares issued by listed companies, as further outlined below (Link).
Improvement to the conversion price adjustment system: For issuance of (redeemable) convertible preferred shares by private placement, if there is an option to adjust the conversion price downwards when the stock price falls (i.e., refixing), an upward adjustment option must be included as well. In this event, the scope of such upward adjustment may not exceed the initial conversion price. However, this regulation does not apply to public offerings, given that public offerings are subject to stricter regulations with respect to issuance procedures, such as the obligation to submit registration statements.
Imposition of a limit on the exercise of call options by the largest shareholder, etc.: If a listed company issues to its largest shareholder or specially related parties (redeemable) convertible preferred shares that grant a call option, the exercise of the call option will be limited to the shareholding ratio of the largest shareholder, etc., at the time of issuance of the (redeemable) convertible preferred shares.
Disclosure of exercise of a convertible bond purchase option granted to a third party: A disclosure obligation will be imposed on the issuer if (a) a third party exercises the call option or (b) the listed company decides to acquire its own (redeemable) convertible preferred shares and sell the same to a third party.
The new announcement is significant in that the regulations on convertible bonds and bonds with warrants will now become applicable to (redeemable) convertible preferred shares as well. According to the FSC, the above will be reflected in the Regulations on Issuance and Disclosure of Securities through an amendment in 2022, which will be announced in September 2022, and we recommend close monitoring of further developments.
II. Mandatory Prior Disclosure of Insider Transactions for Listed Companies
As detailed in our previous newsletter, the FSC announced that it would devise safeguards to shield minority shareholders from large-scale share transfers by executives or majority shareholders of listed companies (Link). On September 13, 2022, it followed up with an announcement that share transfers by insiders (i.e., executives, majority shareholders) of listed companies now must be disclosed “in advance” (Link).
To be specific, if an executive or majority shareholder of a listed company intends to transfer 1% or more of the total number of shares issued by the listed company or shares in the amount of KRW 5 billion or more, the share disposal plan (which specifies, among others, the purpose, expected transfer price and volume, and expected transfer period) must be disclosed by at least 30 days prior to the expected transfer date. To ensure compliance with the prior disclosure obligation, the FSC plans to establish effective enforcement measures, such as criminal punishments, administrative fines and administrative measures (depending on the seriousness of the violation), against failure to make disclosures, false disclosures, or failure to perform disposal plans. However, the prior disclosure obligation will not apply to shareholding ratio changes by external factors (e.g., inheritance, share dividends, M&A through share transfer) or to transactions that are difficult to be disclosed due to their nature, given that their risk of use of material non-public information or of market shock is relatively lower.
If the FSC introduces this regulation, in addition to ex post facto disclosures through the report on the status of specific securities owned by executives and majority shareholders (10% report) under Article 173 of the Financial Investment Services and Capital Markets Act (“FSCMA”), prior disclosures would become mandatory as well. In particular, if a share transfer does not quality for an exception, the disclosed share transfer must take place after the 30-day waiting period following the prior disclosure, which may cause significant obstacles in share transfers by executives and majority shareholders.
The FSC said that it will exert every effort for speedy legislation of the above, including submitting a proposed amendment to the FSCMA reflecting the regulation to the National Assembly in 2022. For reference, the FSCMA amendment bill dated February 14, 2022, and the FSCMA amendment bill dated April 13, 2022, which have been submitted by the members of the National Assembly, also contain similar regulations: (a) if an executive of a listed company submits a disposal plan to the company in advance and transfers or trades shares in accordance with the plan, such an action should not be considered as the use of material non-public information; and (b) if a majority shareholder of a listed company sells 1% or more of the total number of shares issued by the company in three (3) months in the securities market, the shareholder must make a prior disclosure and sell the shares after the lapse of the period prescribed by the Presidential Decree to the extent not exceeding three (3) months.