On July 14, 2022, the Financial Services Commission (the “FSC”) held its second policy seminar, focusing on shareholder protection measures applicable to the listing of split-off subsidiaries and unveiling specific policy tasks for the agency.  This follows the FSC’s earlier policy seminar on June 17, 2022, which focused on enhancing investor protection in the stock market.

Notably, the FSC has set its policy direction for government initiatives in the capital market sector from the perspective of protecting minority shareholders and investors.

1.   Policy for Enhanced Investor Protection in the Stock Market

The FSC mentioned the following policy priorities relevant to enhancing investor protection in the stock market:

• Enhance the transparency of insider trading-related information by requiring prior disclosure of share disposal plan. 

• Develop safeguards to protect the minority shareholders of an acquired company when share transfers result in a change of control.
  ※ Major countries such as the UK, Japan, and EU member states have a mandatory requirement to make a public tender offer for a percentage of shares for anyone wishing to gain management control by purchasing more than a certain number of shares.

• Strengthen responses to unfair trade practices in the capital market by making investigation procedures more efficient and enforcement actions more effective by expanding the use of administrative sanctions such as administrative surcharges.

In particular, the Presidential election pledges and the Transition Committee’s Policy Handbook included a pledge to shield minority shareholders from majority shareholders’ actions such as the monopoly of management control premiums by major shareholders selling their shares.  The FSC announced its plan to develop and implement regulatory improvements tailored to Korea by considering public tender offer rules and other relevant regulations currently implemented in other countries.

2.   Policy for Shareholder Protection Measures Relating to Listing of Split-Off Subsidiaries 

The FSC mentioned the following policy tasks in relation to shareholder protection measures relating to listing of split-off subsidiaries. It appears that the FSC has set a specific deadline for reviewing and implementing measures to prevent damage to minority shareholders of the parent company following the listing of subsidiaries after the spin-off, which were mentioned in the Presidential election pledges and the Transition Committee’s Policy Handbook.

• Strengthen disclosure requirements: For the vertical spin-off of a subsidiary, there will be a mandatory disclosure of corporate restructuring and shareholder protection plans as part of the listing plan.  The listing plan is designed to provide sufficient information to shareholders and enable them to make informed decisions at the general meeting of shareholders when approving the spin-off, etc.

• Require 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 circumstances, the parent company is found to have failed to have sufficiently communicated to 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.

• Provide appraisal rights to demand share repurchase: Shareholders who are opposed to the spin-off but whose voices are excluded from the decision-making process 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 the practical consequences and decide, in consultation with other competent ministries (such as the Ministry of Justice), whether to require preferential allocation of new shares to shareholders of the parent company of a vertically split-off subsidiary.  The FSC will consider the following issues: (i) identification of shareholders who are entitled to protection at the parent company, (ii) compatibility with the principles governing the allocation of new shares in the Commercial Code, and (iii) heightened volatility of a parent company’s share price prior to the listing of a subsidiary.

The FSC plans to announce a policy improvement plan after conferring with the Ministry of Justice and other relevant authorities based on feedback from the policy seminars. 

If public tender offer rules are introduced as part of the policy to enhance investor protection in the stock market, the structure of the regulatory system to be implemented will significantly impact proposed transactional structures and prices (including control premiums) for large corporations, private equity funds, and others wishing to sell their publicly traded subsidiaries.  Those planning to sell, buy, or merge a publicly traded subsidiary will need to closely follow these developments.

As many as 110 publicly traded companies have reportedly undergone a spin-off since 2020.  If the FSC introduces shareholder protection measures relating to the listing of split-off subsidiaries, this may affect businesses contemplating vertical spin-offs, as well as businesses that have already undergone vertical spin-offs and are getting ready for listing.  Furthermore, 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 the listing of business units.