As we informed you previously, on January 26, 2023, the Ministry of Justice (“MOJ”) presented its annual work plan for 2023 and announced “Five Key Policy Initiatives for 2023” (Link). As part of its initiative to construct a legal infrastructure that can ensure future prosperity, the MOJ announced the following amendments of the Korean Commercial Code (“KCC”) that are aimed to improve the corporate environment and reinforce shareholder protection:
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1. |
Introducing a virtual shareholder meeting system (digitalization of meeting convocation notices, shareholder voting and the meeting as a whole) [First half of 2023] |
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2. |
Strengthening shareholder protection in corporate restructuring processes (e.g., recognition of appraisal rights) [First half of 2023] |
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3. |
Easing regulations for small-sized companies to promote the establishment and operation of start-ups [Second half of 2023] |
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4. |
Improving dividend-related procedures and methods to promote in-kind and stock dividends [Second half of 2023] |
As a follow-up measure to the items 1 and 2 mentioned above, the MOJ issued an advance notice of the proposed amendments to the KCC (the “Proposed Amendment”) on August 24, 2023 that introduces virtual shareholder meetings and aims to improve the appraisal rights regime.
The Proposed Amendment introduces a virtual shareholder meeting system by amending the provisions relating to the place of general shareholders’ meetings, which is expected to fundamentally change how companies respond to minority shareholders and operate general shareholders’ meetings.
In addition, the Proposed Amendment addresses a number of practical issues with respect to appraisal rights of dissenting shareholders which are commonly becoming a point of importance for various types of corporate restructuring, such as mergers, spin-offs, spin-off mergers, comprehensive stock exchanges and transfers, and business transfers. In particular, the following issues have been ameliorated by reference to foreign legislative examples: (i) the issue of double payment of dividends and default interest (owing to the fact that the dissenting shareholder gets both the shareholder and creditor status recognized during the ongoing dispute over the purchase price of appraisal rights) and (ii) the issue of substantial default interest at the rate of 6% per annum (pursuant to Article 54 of the KCC) being imposed even on the undisputed portion of the purchase price (owing to the inability to make a partial deposit). Furthermore, appraisal rights of dissenting shareholders will be recognized in the case of vertical spin-offs that satisfy a certain size requirement. If the Proposed Amendment is enacted into law, dissenting shareholders’ appraisal rights will be recognized also in the case of a vertical spin-off of unlisted companies. Pursuant to the amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act covered in our prior newsletter (Link), dissenting shareholders’ appraisal rights were previously recognized in the case of a vertical spin-off of listed companies only.
Key details of the Proposed Amendment are as follows:
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1. |
Introduction of Virtual Shareholder Meetings |
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(1) |
Digitalization of general shareholders’ meetings as a whole, including notices, holding the meeting, attendance and voting. |
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(2) |
In addition to the physical meeting of shareholders, the following types of virtual shareholder meetings will allowed pursuant to the company’s articles of incorporation:
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(3) |
In relation to the method of obtaining shareholders’ consent for sending meeting convocation notices by means of electronic documents, it is stipulated that shareholders’ consent may be obtained by electronic means in accordance with the Enforcement Decree of the KCC. |
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2. |
Improvement of Appraisal Rights Regime |
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(1) |
Appraisal rights will granted to dissenting shareholders in the event of a vertical spin-off in excess of 10% of the total assets of the spun-off company. |
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(2) |
Dissenting shareholders to be converted to creditor status if the purchase price calculated by the company is fully paid by the effective date of the corporate restructuring event (such as merger and spin-off). |
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(3) |
In the event of a dispute over the purchase price, there will be an option to make a deposit of an amount that is equal to or greater than the purchase price notified by the company to the shareholder in connection with appraisal rights (i.e., partial deposit to be allowed). |
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(4) |
Required to provide shareholders with specific grounds for calculating the purchase price of appraisal rights and to guarantee the right to review and make copies of relevant records. |
The MOJ plans to consider opinions from various stakeholders following its advance notice and to have the Proposed Amendment passed at the National Assembly’s regular session this year, with the goal of having the amended KCC come into force during the course of next year. With the enactment of the Proposed Amendment, there is likely to be a significant impact on how companies respond to minority shareholders, operate general shareholders’ meetings and implement corporate restructuring transactions, which would warrant close attention.
