The Financial Services Commission (the “FSC”) and the Korea Fair Trade Commission (the “KFTC”) announced key amendments to corporate laws and improvements to corporate governance guidelines in the second half of 2022.  These include (i) minority shareholder protection measures when listing spun-off subsidiaries, (ii) regulations on refixing and call options for (redeemable) convertible preferred shares issued by listed companies, (iii) introduction of mandatory ex-ante disclosure of insider trading, (iv) measures for the implementation of the 5% reporting rule, and (v) adjustments to the scope of specially related parties and affiliates in the regulatory framework for large business groups.

The introduction of the regulations mentioned above by the FSC and the KFTC may have a significant impact on listed companies’ restructuring transactions, financing, responses to minority shareholders and operation of general shareholders’ meetings.

1.   Measures to Enhance General Shareholders’ Rights and Interests when Listing Spun-off Subsidiaries
 

On September 5, 2022, the FSC announced its plans to enhance the rights and interests of general shareholders with respect to listing of spun-off subsidiaries, including the three measures outlined below.

• Introduction of appraisal rights – Granting appraisal rights to shareholders who dissent from listing a spun-off subsidiary.

• Tightened disclosure requirement for listing – Mandatory disclosure through the Report on Major Facts containing specific purposes of vertical split-off (restructuring, sale, listing, etc.), anticipated impact and measures to protect general shareholders.

• Stricter listing reviews – Listing a company within five years of a spin-off may be restricted if the Korea Exchange (the “KRX”) finds that the parent company has failed to make sufficient efforts to protect its general shareholders through measures such as collecting opinions from, and communicating with, the shareholders.
   

As a follow-up measure, the FSC announced proposed amendments (the “Proposed Amendments”) to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”) regarding the introduction of appraisal rights, and gathered public comments from September 5, 2022 to October 17, 2022.  It also announced that it will update the Guideline on Completing the Corporate Disclosure Form and the Listing Guidebook.
 

2.   Regulations on Refixing and Call Options for Redeemable Convertible Preferred Shares Issued by Listed Companies
 

On September 7, 2022, the FSC announced that it would apply the same regulations to (redeemable) convertible preferred shares issued by listed companies as outlined below.  The regulatory intent is to apply regulatory consistency in line with the existing convertible bond and equity-linked security regimes:

• 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 price downwards when the stock price falls (i.e., refixing), an upward adjustment option must be included as well.

• Imposition of a ceiling on the exercise of call options by the largest shareholder – 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, at the time of issuance of the (redeemable) convertible preferred shares.

• Disclosure of the exercise of a convertible bond purchase option granted to a third party – A disclosure obligation will be imposed on the issuer if (i) a third party exercises the call option, or (ii) the listed company decides to acquire its own (redeemable) convertible preferred shares and sell the same to a third party.
   

3.   Mandatory Ex-Ante Disclosure of Insider Trading for Listed Companies
 

On September 12, 2022, the FSC announced that share transfers by insiders (i.e., executives and majority shareholders) of listed companies must be disclosed “in advance.”  To be specific, if an executive or a 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 at least 30 days prior to the expected transfer date.

The FSC said that it will exert every possible effort to expedite the enactment of the above.  The efforts include submission of the Proposed Amendments to the National Assembly within 2022.
 

4.   Measures to Improve the Substantial Shareholding Reporting Requirements
 

On August 17, 2022, the FSC announced its plan to amend the Corporate Disclosure Form and the Practical Guidelines on Corporate Disclosure for the purposes of investor protection and enhancing the fairness and transparency in competitions for corporate control.  The amendment will require shareholders intending to participate in the management to provide detailed plans regarding the purpose of their participation in the substantial shareholding report (also referred to as the “5% report”).

Shareholders that have a management participation objective but have not yet established detailed plans at the time of filing their substantial shareholding report will be required to file a “corrective disclosure” once such plans are subsequently established.  Shareholders that have a management participation objective and have established detailed plans will be required to disclose such plans, along with the detailed procedures (i.e., shareholder proposals for appointing a certain director and proxy voting recommendations), while refraining from simply reiterating the examples stipulated in Article 154 (1) of the Enforcement Decree of the FSCMA.
 

5.   Proposed Amendment to MRFTA Enforcement Decree that Adjusts the Scope of Specially Related Parties and Affiliates
 

On August 11, 2022, the KFTC published proposed amendments to the Enforcement Decree of the Monopoly Regulation and Fair Trade Act (the “MRFTA”) to streamline the regulatory framework for large business groups (the “Proposed MRFTA Amendments”).  Key changes to the scope of specially related parties and affiliates in the Proposed MRFTA Amendments that bear significance on business group regulations are as follows:

• Adjustment of the scope of relatives within the “same person” category (Article 4, Subparagraph 1, Item A of the Proposed MRFTA Amendments): The Proposed MRFTA Amendments narrow the scope of relatives other than the spouse to exclusively include lineal relatives within the fourth degree of consanguinity, or relatives within the third degree of affinity.  However, a lineal relative within the fifth or six degree of consanguinity or a relative within the fourth degree of affinity will still be included, if he/she (i) owns 1% or more of the shares in a company owned by the same person, or (ii) can exert substantial control over the same person by having granted extended loans or = guarantees in favor of the same person.  The spouse of the same person in a de facto marriage, who is the biological father or mother of the same person’s biological offspring under the Civil Code is also considered to be a relative within the scope.

• Exclusion of companies controlled by outside directors (Article 4, Subparagraph 1, Item D of the Proposed MRFTA Amendments): Under the Proposed MRFTA Amendments, a company controlled by an outside director will be excluded by default from the scope of affiliated companies, unless the requirements for officer independent management are not met (i.e., on an opt-in basis as opposed to an automatic affiliation basis). 
   

The above-listed changes to corporate laws and regulations on corporate governance in the second half of 2022 are expected to significantly impact restructuring, capital raising, and trading of major shareholders of listed companies.  Furthermore, changes to disclosure reports of large-scale shareholding by institutional investors, and regulations on affiliates of business groups under the MRFTA are expected.

In particular, considering stricter regulations on vertical spin-offs, any companies that have financing plans via separation of major business units or listing should secure necessary funds for appraisal rights granted to dissenting shareholders and take caution to comply with ex-ante disclosure requirements and listing requirements aimed at protecting minority shareholders.  Refixing and limitations on the exercise of call options when issuing (redeemable) convertible preferred shares may also affect the financing procedures.  The ex-ante disclosure rule for insider trading may impose obligations to make advance disclosures for share transfers by executives and major shareholders, and we also anticipate changes to disclosure requirements for the report on the status of large-scale shareholding.
      
In addition, the Proposed MRFTA Amendments, if enacted, will change the scope of specially related parties such as relatives and affiliates.  This will trigger subsequent changes to multiple regulations on governance, such as disqualification requirements for outside directors of listed companies and regulations on transactions with affiliates under Article 542-8 and Article 542-9 of the Korean Commercial Code, respectively.

{Korean Version]