There were significant regulatory changes regarding corporate governance and corporate finance of listed companies in the first half of 2023.

First, following the mandatory tender offer system announced by the Financial Services Commission (the “FSC”) on December 21, 2022, designed to enhance the rights and interests of general shareholders in case of a change in management control by way of share transfer, 11 members, including National Assemblyman Chang-Hyun Yoon, proposed partial amendments to the Financial Investment Services and Capital Markets Act (the “FSCMA”) on May 30, 2023, introducing the mandatory tender offer system (the “Proposed Amendment”). Second, in line with the FSC’s announced plan to improve the treasury stock system of listed companies, the FSC held the “Seminar on Improvement of the Treasury Stock System of Listed Companies” to explain the details of the system on June 5, 2023. Last but not least, on July 7, 2023, the FSC amended the Regulations on Financial Investment Business (the “Regulations”) to abolish the foreign investor registration system, and ease restrictions on over-the-counter (“OTC”) trading of listed stocks by foreign investors.

The partial amendments to the FSCMA were introduced to improve the governance and financial structure-related regulations of listed companies, in order to, among other things, enhance shareholder and corporate values, and address the “Korea Discount” issue.
 

The key details of the Proposed Amendment regarding the mandatory tender offer system are as follows: 
 

If a person becomes the largest shareholder (holding at least 25% of the total number of shares) of a listed company by way of, purchasing listed shares from a specific investor, among others, such person must make an additional tender offer for a certain number of shares after the purchase of these specific shares, except under certain cases where such tender offer may infringe on the rights and interests of other shareholders. According to the FSC’s proposal, if the obligation to purchase 50% + one share or more in total (i) makes the number of shares subject to the tender offer exceed 50%, the person shall be allocated shares on a pro rata basis, and if it (ii) makes the number of shares less than 50%, the person shall be obligated to purchase only such shares subject to the tender offer.
 

Any person who intends to make a mandatory tender offer must issue a public notice, disclosing the identity of the person who intends to make the mandatory tender offer, the issuer of the shares to be purchased, the purpose of the purchase, the type and number of the shares to be purchased, and the terms and conditions of the mandatory tender offer within 15 days from the date of the purchase of the shares.
 

Any person who makes a mandatory tender offer shall purchase shares at a price that is the same or higher than the price prescribed by the Presidential Decree. According to the FSC’s proposal, this price includes the management control premium paid at the time of purchase of controlling shareholder shares.
 

If the purchaser of the controlling shareholder’s shares fails to make a public notice of a mandatory tender offer, or makes a false representation on material matters, the purchaser’s voting rights will be restricted.
 

At the “Seminar on Improvement of the Treasury Stock System of Listed Companies,” held by the FSC on June 5, 2023, the Vice Chairman of the FSC, So-Young Kim, stated that the FSC will consider various policy measures to ensure that the treasury stock system of listed companies is not abused as a means of expanding control by major shareholders in a circumventing manner, and is used for the originally intended purpose of enhancing shareholder value.

With the above issues in mind, Professor Joon-Hyug Chung of Seoul National University gave a presentation at the seminar, introducing the treasury stock systems in Korea and abroad, and explaining specific measures to improve the treasury stock system as follows:
 

• Compel the cancellation of all treasury stocks or make it mandatory to hold no more than a certain percentage of treasury stocks, such as 10%;

• Apply the same procedure as that used for the issuance of new shares when disposing treasury shares;

• Prohibit the equity swap of treasury stock;

• Suspend shareholders’ rights by prohibiting the allocation of new shares to treasury shares in case of a merger/spin-off;

• Exclude treasury shares in calculating indices measuring the financial position of listed companies, such as market capitalization; and

• Strengthen disclosure on the acquisition and disposal of treasury stock.
   

The key details of the Regulations amended by the FSC on July 7, 2023, are as follows:
 

The foreign investor registration system will be abolished to allow foreigners to invest in listed securities in Korea without prior registration. It is possible for foreigners to invest in Korean listed securities by using a Legal Entity Identifier (“LEI”) in case of foreign corporations and the passport number in case of foreign individuals.
 

Currently, foreign investors are required to trade listed securities, in principle, on exchange, and allowed to engage in Over-the-Counter (“OTC”) trading only in exceptional cases, such as cases of foreign direct investment and the exercise of appraisal rights by dissenting shareholders.

The amendment significantly expands the scope of exceptional ex-post facto reporting requirements for cases where there is a low need for review, and market participants have a high demand for OTC transactions, for example, (i) the acquisition and disposal of shares through spin-offs/split-offs and mergers of foreign corporations, and (ii) the acquisition and disposal of securities through in-kind dividends of securities held by foreign corporations.
 

Please note that the above regulatory changes may cause significant changes to listed companies’ M&As and various restructuring transactions, the responses of minority shareholders of listed companies and the operation of general shareholders’ meetings, and foreign investment in listed companies.

[Korean Version]