On January 23, 2024, the Financial Services Commission (the “FSC”) held a meeting for improving the soundness of the convertible bond (“CB”) market, presided over by Vice Chairman Kim Soyoung, where it announced and discussed proposed measures to enhance the soundness of the CB market (Link).
 
Vice Chairman Kim pointed out that while CBs, combined with call option and refixing (i.e., downward conversion price adjustment) features, have served as a major means of financing for SMEs and startups, they are associated with a number of issues outlined below, including the problem of some major shareholders undermining shareholder value (e.g., by expanding their control through circumvention of legal requirements or making unfair profits):
 

• Lack of transparency in the issuance and distribution of CBs hindering market surveillance and checks

• Arbitrary adjustment of conversion prices based on ambiguous regulations leading to the dilution of the interests of ordinary shareholders

• Additional features such as call options and refixing being potentially misused for unfair trading
   

Below is a summary of the proposed measures announced as part of the “Plan for Enhancing the Soundness of the CB Market” to address the problems described above:
 

• Disclosure obligation upon designation of a call option exerciser: When a company designates a party that may exercise a call option, it will be required to disclose relevant information, including who the exerciser is, whether a fair consideration has been received (when the issuer grants a call option to a third party) and the amount of payment.
   

• Strengthening of information disclosure related to the acquisition of “CBs prior to maturity” by an issuer: As a resale of CBs prior to maturity is practically similar to a new issuance, there has been a recognition of the need to strengthen relevant disclosure rules. As a result, issuing companies will be required to disclose reasons for such acquisitions prior to maturity and future measures for disposition (e.g., cancellation or resale).
   

• Mandatory disclosure through a material fact report one week prior to payment date: When a company issues privately placed CBs, it will be required to make a disclosure by filing a material fact report following the board of directors’ resolution for such issuance by no later than one week prior to the payment date, as in the case of a privately placed capital increase (this measure is being pursued through the proposed amendments to the Financial Investment Services and Capital Markets Act, submitted to the National Assembly in December 2022).
   

• Limited exceptions to the minimum level of refixing based on market price fluctuations: Current rules limit the minimum level of refixing based on market price fluctuations to 70% of the initial conversion price but allow companies to go below this minimum level (i.e., below 70% of the initial conversion price) in certain exceptional cases through a special resolution at a general shareholders’ meeting or based on the company’s articles of incorporation. Under the proposed measures, the exception to the minimum level of refixing based on the articles of incorporation, which has often been used unjustifiably, will be removed and the only permitted exception to the minimum level of refixing will be by way of securing an approval at a general shareholders’ meeting (for each case).
   

• Prevention of excessive downward adjustment of conversion price: When the value of conversion right is diluted due to a company’s capital increase or stock dividend, among others, the conversion price will be permitted to be adjusted downward only to a price at or above the price taking the effect of dilution into account.
   

• Clarification of record date for calculating conversion price of privately placed CBs: Current rules, in principle, require the conversion price to be calculated based on the stock price on the date immediately preceding the board of directors’ resolution to issue CBs. This has prompted some companies to exploit measures such as continuously postponing the payment date following the calculation of the conversion price until the stock price rises. In order to ensure that the stock price immediately preceding the issuance is fairly reflected in the conversion price, the reference price as of the “actual payment date,” in principle, will be reflected in the calculation of the conversion price of privately placed CBs under the proposed measures.
   

• Constant efforts will be made to discover and probe any potential unfair trading activities involving privately placed CBs.
   

In order to expedite the implementation of the above “Plan for Enhancing the Soundness of the CB Market,” the FSC announced that it would aim to fully implement matters simply requiring the amendment of the subordinate regulations in the first half of the year, while bolstering its legislative support efforts for matters requiring any changes in law. Once the above measures are implemented, there may be significant changes in the transaction practices of listed companies such as issuance of CBs, acquisition and resale of CBs prior to maturity, adjustment of conversion price or refixing, and granting of call options to major shareholders.

[Korean Version]