Following up on our March Newsletter (link), we set out in this newsletter the KRX’s recently announced proposed amendments to certain delisting rules (link).  They implement the pledges the President made during his presidential election campaign early this year and aim at improving corporate governance and capital markets through the restructuring of delisting rules and expansion of the phased delisting management system in the hopes to prevent companies whose listing can be sustained from being delisted and achieve better protection of companies and investors.  They also address one of the 110 National Agenda advanced by the Presidential Transition Committee to improve capital markets, namely the revision of delisting rules, in addition to the changes relating to the regulations on listing following split-off and the introduction of the pre-disclosure system for insider trading for which specific policy directions were recently announced. 
 

The proposed amendments reflect the outcome of the discussions at the 3rd Financial Regulatory Innovation Meeting the Financial Services Commission held on September 30, 2022, the gist of which is to ensure that all delisting decisions are made after careful consideration of the sustainability of a business and to revise delisting requirements and procedures in an effort to minimize damages to investors.  Key propositions are as follows. 
 

1.   Financial-related delisting factors become subject to substantive assessment

Under the current regulations, a decline in sales or equity capital and the incurrence of a loss are technical delisting factors and when a company faces delisting based on these factors, it is not given an opportunity to object.  Under the proposed amendments, the KRX Corporate Review Committee and the Market Committee will take these factors under substantive review and a company will be granted the right to file an objection against the decision to be delisted based on these factors.  The substantial review will examine a company’s deterioration in earnings and assess whether the temporary deterioration is caused by global economic downturn, COVID-19 or a reason unrelated to the sustainability or the fundamentals of the business, and otherwise take into full consideration the various aspects of the company’s business, including its future prospects and the stability of its business operation and management.
 

【Finance Delisting Factors Subject Substantive Review per Market】

2.   Granting opportunities to object when a KOSDAQ listed company fails to submit a periodic reports or meet the required minimum trading volume

If a company listed on KOSDAQ Market is delisted due to the failure to timely submit a periodic reports or meet the required minimum trading volume, it will be given the opportunity to object to the delisting decision and given a chance to address the failure (note that this only concerns KOSDAQ Market).  The proposed amendments embrace the fact that (1) a company may inevitably miss a report submission deadline because of the delay in completing the necessary due diligence on an overseas subsidiary and that (2) the ability to meet the required trading volume may not necessarily reflect the sustainability of its business, and it should, therefore, be given the opportunity to show the business can improve by executing a liquidity supply agreement or otherwise. 
 

3.   Rationalization of other delisting factors

A company’s stocks being traded at “below required market price” will be removed from the list of delisting factors and replaced with “below market capitalization requirement”.  On KOSDAQ Market, a company will no longer be delisted because it recorded “operating losses for 5 consecutive years”.  Instead, a “capital impairment” factor will be applied if a company has suffered long-term losses.  Also, on KOSDAQ Market, the existence of an “unqualified opinion regarding internal accounting management system for 2 consecutive years” will no longer be subject to substantive review.  Rather, it is whether the company seeks an “external auditor’s opinion” that will be considered in assessing the transparency of its business operations.  Moreover, on KOSDAQ Market, the timing for administrative item designation and delisting application based on capital impairment, etc. will change from semi-annually to annually.  And if 5 years or more have passed since the occurrence of an event qualifying as a delisting factor and the effect of such event on the current status of a company is negligible at the time when the factor is being examined in relation to a potential delisting, then the factor will be excluded from substantive review. 
 

At the 3rd Meeting on Financial Regulatory Innovation, some voiced concerns that the proposed expansion of substantive review will prolong the delisting/exit process and the more effective option would be to instead revise and adjust the technical delisting factors.  In response, the KRX vouched to devise a system that allows prompt decision-making balancing both the sustainability of a business and the protection of investors.  The plan is to announce proposed amendments to the IPO Regulations and the Detailed Enforcement Rules in October or November, 2022.

The proposed amendments to KRX’s delisting regulations will pave the way to a more flexible delisting review if a company’s financial status becomes affected by events unrelated to the business’ sustainability or fundamentals such as a temporary slowdown or deterioration, or unpredictable changes in external circumstances.  We recommend that all listed companies and their current and potential investors keep an eye on the developments and implementation of these proposed amendments as these may affect their business operations or investment decisions.
 

[Korean version]