There has been increasing demand for regulatory improvements regarding transactions carried out to improve companies’ business structures and governance practices, including mergers and spin-offs, which aim to facilitate corporate governance and restructuring, as well as to protect minority shareholders and general investors.
In light of the increase in demand for regulatory improvements, Government authorities and other relevant stakeholders have been engaging in multiple discussions on how to improve regulations and systems regarding corporate governance.
1. Proposed Amendment to the Korean Commercial Code Regarding Directors’ Fiduciary Duty
Some have pointed out that, during the course of business and governance restructuring transactions (e.g., vertical spin-offs), there have been a number of cases where companies’ managements have made decisions that benefit only controlling shareholders, harming the interests of minority shareholders as a result. In light of the foregoing, voices stating that such cases should be resolved through legislation have been raised.
As one of the initiatives to resolve the aforementioned issue, amendments to the Korean Commercial Code (the “KCC”) have been proposed by members of the National Assembly, whereby directors would have to take into account shareholders’ proportionate interests or the interests of all of the shareholders in addition to fulfilling their traditional obligations to care for a company. Such proposals are currently pending at the National Assembly (partial amendment to the KCC proposed by National Assembly Member Yong-Woo Lee, etc. on March 22, 2022 and partial amendment to the KCC proposed by National Assembly Member Ju-Min Park, etc. on January 9, 2023).
2. Discussions on Regulatory Improvements Regarding Treasury Stocks
Taking into consideration continuous criticism regarding companies’ utilization of treasury stocks to strengthen major shareholders’ control at the expense of minor shareholders in the course of carrying out governance restructuring through measures such as horizontal spin-offs, the Government and relevant agencies have been continuously reviewing regulations on treasury stocks.
Earlier this year, the Financial Supervisory Service announced as part of its plan for 2023, that companies would be required to take additional care when disclosing the purpose behind their acquisition or disposal of treasury stocks. In addition, the Financial Services Commission (the “FSC”) appears to be seeking out comments from relevant ministries, agencies, and various stakeholders in preparation for its plans to review and propose directions to improve treasury stock-related regulations during the second quarter of 2023.
The Korea Exchange also seems to be contemplating to set up measures to review whether the listing of stocks of new companies established pursuant to horizontal spin-offs should be permitted, scrutinizing whether (i) the opinions of relevant shareholders were taken into account and (ii) appropriate protective measures/plans have been implemented for the benefit of ordinary (non-controlling) shareholders, especially if a company (a) has a disproportionately large number of treasury stocks or (b) undertook measures to greatly increase its number of treasury stocks immediately prior to carrying out a horizontal spin-off transaction.
In addition, amendments to the KCC and the Monopoly Regulation and Fair Trade Act that aim to prevent the utilization of treasury stocks in the course of governance restructuring, such as restructuring through horizontal spin-offs, have been proposed by members of the National Assembly and are currently pending at the National Assembly (partial amendment to the KCC proposed by National Assembly Member Yong-Jin Park et al on June 16, 2020 and partial amendment to the Monopoly Regulation and Fair Trade Act proposed by National Assembly Member Yong-Woo Lee et al on December 8, 2021).
3. FSC’s Plan to Support Corporate M&A Transactions
The FSC has recently announced the “Corporate M&A Support Plan” to promote M&A transactions, which promote management efficiency and facilitate business reorganizations.
The Corporate M&A Support Plan provides for several regulatory improvements including, among others, (i) mitigating the burden of securing funds in the event of a tender offer and (ii) simplifying conversion procedures with respect to instruments such as convertible bonds (“CBs”) and bonds with warrants (“BWs”) during spin-off/spin-off merger transactions. In particular, the plan takes into account recent criticism stating that the current rigid nature of calculating merger prices makes it difficult to properly reflect the true corporate value in determining the merger ratio and hinders unrestricted negotiation between the relevant parties, and proposes to allow for autonomous calculation of merger price in mergers between companies that have not been affiliated with each other for a year or more, on the premise that external valuation will be mandatory.
The FSC has announced that it plans to effectuate the proposals set forth in the Corporate M&A Support Plan by making appropriate amendments to regulations by the end of this year, and promoting amendments to the law as soon as possible.
4. Discussions on Regulating Proxy Advisory Firms
With the growing influence of domestic and overseas proxy advisory firms over the exercise of shareholders’ voting rights in certain matters that require the approval of the general meeting of shareholders (e.g., mergers, spin-offs, important business transfers), there have been concerns that systematic management and supervision of the activities of proxy advisory firms are necessary. In response, financial supervisory authorities appear to have been reviewing means to manage and supervise such firms.
As set forth above, multilateral discussions are underway in various fields to improve regulations with respect to corporate restructuring activities. However, whether such discussions would lead to legislations, and if so, when and to what extent such legislations would be implemented still remain uncertain. As such, it is advisable for companies that plan to engage in transactions and activities for business/corporate governance restructuring to incorporate insights gained from analyzing the ongoing discussions and regulatory trends into their new undertakings. In addition, companies should be prepared to effectively respond to issues that may arise in the rapidly-changing regulatory environment.
