On January 31, 2023, the Financial Services Commission (the “FSC”) and the Ministry of Justice (the “MOJ”) issued a press release outlining their plans to improve dividend distribution procedures in an effort to align them with global standards (Link). According to the press release, Korean companies first determine which shareholders are entitled to receive dividends at the close of a fiscal year (i.e., dividend record date), and then have the shareholders approve at the ordinary general meeting of shareholders in March, the following year, whether dividends will actually be paid out to them as well as the distribution amount. Such practice, which deviates from global standards, has been pointed out as one of the factors contributing to the undervaluation of Korean companies’ stocks in the Korean stock market. The published improvement plans purport to resolve such “Korea discount” factor by requiring the dividend record date to fall after the shareholders’ resolution approving dividend distribution. This will enable the market to accurately forecast upcoming dividend payouts as well as distribution amount and have this properly reflected in the stock price.
The regulations relating to dividend procedures will be amended to implement the improvement plans, and it is expected that this will bring about significant changes in the existing practices of listed companies relating to the operation of the general shareholders’ meetings and dividend payouts. Listed companies should bear the upcoming amendments in mind when preparing the agenda for the 2023 ordinary general meeting of shareholders’ in respect of dividend distribution and amendment to their articles of incorporation (e.g., to amend the dividend record date).
Key details of the improvement plans are as follows:
1. Regular dividend distributions of listed companies (Korean Commercial Code)
Customary practice has been for Korean companies to set the record date and determine which shareholders are entitled to receive dividends at the end of the fiscal year, and then decide on the actual dividend payouts as well as distribution amount at the ordinary general meeting of shareholders held in March, the following year. The lack of information on the record date made it difficult for investors and shareholders to predict whether and how much dividend will eventually be paid out for that fiscal year.
The practice originated from designating the last day of a fiscal year as the record date for the exercise of shareholders’ voting rights and dividends when applying Article 354 (1) of the Korean Commercial Code. In light of the improvement plans, an official ruling on Article 354 of the Korean Commercial Code was published providing that a company may bifurcate the dividend record date and the record date for voting rights at the general meeting of shareholders, thus the date on which the shareholders approve dividend distribution and distribution amount can occur first, then followed by the dividend record date.
2. Quarterly dividend distributions of listed companies (Financial Investment Services and Capital Markets Act)
Under Article 165-12 of the current Financial Investment Services and Capital Markets Act (the “FSCMA”), a listed company may distribute dividends to its shareholders as of the end of March/June/September (i.e., record date for quarterly dividend distributions) by a resolution adopted by the board of directors (at which the distribution amount is approved) at a meeting held within 45 days following the end of the quarter. This has been the same source for lack of information as discussed above in respect of the Korean Commercial Code.
According to the improvement plans, an amendment to the FSCMA will be proposed to allow the record date for quarterly dividends to fall after the quarterly distribution amount is decided by the board of directors. Specifically, the article in the FSCMA, which by operation of law designates as of the end of March/June/September the shareholders of a listed company entitled to receive dividends will be deleted. This way, a listed company may choose to have the quarterly dividend record date fall after the date on which quarterly dividend distributions are approved by the board. The 20-day preparation period to process dividend payments will be extended to 30 days to provide sufficient time for companies to complete dividend payouts.
3. Improving listed companies’ practices
Furthermore, the improvement plans involve encouraging listed companies to actively participate in implementing the improvements described above by (i) introducing amendments to a standard form of the articles of incorporation for listed companies reflecting the improvements (in February 2023), (ii) requiring companies to disclose dividend procedures improvements newly adopted in their corporate governance reports to put investors easily on notice of the upcoming agenda (from 2024), and (iii) setting up an integrated platform (webpage) to publicly notify third parties of all listed companies’ dividend record dates as each company may end up having a different record date (in January 2024).
