Recent Regulatory Trends in Corporate Governance Restructuring Transactions

The Government and supervisory authorities have recently held discussions on various forms of system improvement in corporate governance restructuring transactions. The system improvement efforts could largely be classified into (i) discussions related to prevention of abuse of corporate governance restructuring transactions as a means to expand the control of major shareholders, and (ii) discussions related to protection of the rights and interests of minority shareholders and general investors in corporate governance restructuring transactions.

On prevention of corporate governance restructuring transactions from being abused as a means to expand major shareholders’ control expansion, discussions revolved around (i) system reform related to treasury stocks, including restricting the allotment of new stocks for treasury stocks during the spin-off process of listed companies, and (ii) the strengthening of disclosure standards when awarding stocks to officers or major shareholders.

On protection of the rights of minority shareholders and general investors, discussions related to the following have taken place: (i) the implementation of a prior disclosure rule, effective from July 2024, for stock trading by listed company officers and major shareholders, (ii) an amendment of the Financial Investment Services and Capital Markets Act (the “FSCMA”) to strengthen governance restructuring transaction-related disclosure requirements and improve the external valuation system, and (iii) the introduction of a system to expand dissenting shareholders’ appraisal rights to include unlisted companies’ split-offs through an amendment of the Korean Commercial Code, among others.

Specifically, the following are the key details of regulations that are currently pending enactment or are being discussed by the Government or supervisory authorities:

1.	Prevention of Corporate Governance Restructuring Transactions From Being Abused as Means to Expand Major Shareholders’ Control

(1)

Improvement of systems in relation to listed companies’ treasury stock

On January 30, 2024, the Financial Services Commission (the “FSC”) held a meeting (Link), to announce its plan on system improvement to ensure that listed companies’ treasury stock schemes (i) are not abused as a means to expand major shareholders’ control, and (ii) are utilized for their intended purpose of enhancing shareholder value.

As part of the its efforts to improve the system, the FSC announced plans to address concerns about listed companies using spin-offs to expand major shareholders’ control without additional investments (so-called “treasury stock magic”). In order to regulate this practice, the FSC intends to restrict the allotment of new stocks as treasury stocks during spin-off processes by listed companies and aims to strengthen the examination of new companies that are re-listed after spin-offs. In addition, regarding the comment on the lack of transparency despite the fact that companies’ subsequent handling of procedures after acquiring treasury stocks would significantly affect stock prices, the FSC also announced plans to (a) comprehensively strengthen disclosure requirements related to the process involving stock acquisition, ownership, and disposal, and (b) thereby provide ordinary shareholders with sufficient information with respect to treasury stocks (including information on how such stocks are to be utilized).

The FSC plans to implement the above-mentioned system improvement measures by amending the Enforcement Decree of the FSCMA as early as in the first half of 2024. As a result, it is possible that the Korea Exchange (the “KRX”) review process/securities report examination process, particularly for transactions involving a company’s plan to carry out a spin-off while holding treasury stocks, will take into consideration these planned system improvements. Companies are advised to thoroughly review the proposed amendments and the positions taken by the relevant supervisory authorities regarding the details of these changes. In particular, the announced system improvement measures do not appear to include the requirement to retire treasury stocks following their acquisition, which had previously been discussed.

(2)

Requirement to indicate utilization of stock awards (share-based payments) by officers and employees in business reports

As an increasing number of companies have recently been utilizing not only stock options, but also performance-based stock awards and restricted stock awards (“RSAs”), which are not particularly regulated by the current laws and regulations, the Financial Supervisory Service (the “FSS”) amended and enacted disclosure-related forms at the end of 2023. The FSS pointed out two main issues: (i) such stock awards may be abused to expand major shareholders’ control, and (ii) investors are facing difficulties in accurately identifying relevant information as a result of inconsistent application of disclosure requirements (e.g., whether disclosure would be required and what level of disclosure would be required).

Accordingly, starting from the first half of 2024, companies are required to indicate the operation status of each share-based payment in the “officers’ remuneration” section of the semi-annual report (the indication of such information would be optional with respect to quarterly reports), and particularly, if any stock awards (excluding stock options) have been provided to major shareholders, companies would also be required to indicate the grant/payment status for each relevant major shareholder in the “transactions with major shareholders” section of the quarterly/semi-annual report. In addition, any company that has decided to acquire/dispose of treasury stocks for the purpose of making share-based payments would be required to indicate in the “purpose of acquisition (disposal)” section of the report on key business matters that the purpose of acquiring/disposing treasury stocks is for share-based payments. Furthermore, companies should indicate in the “other matters to be noted in investment decision” section the key terms of the share-based payment, including the name of the specific compensation scheme, the number of recipients, the number of stocks to be paid and payment conditions. Finally, officers and major shareholders of a listed company receiving RSAs would be required to indicate the relevant key terms, including the date of payment, payment conditions (qualifications), and the period and method of restriction in a note to the report on officers and major shareholders’ ownership of certain securities (10% report).

In the first half of 2024, the FSS plans to carry out a review of the status of disclosure of share-based payments, and if necessary, implement measures such as requesting voluntary corrections. In light of the foregoing circumstances, companies that have made share-based payments should take particular care in making relevant disclosures.

2.	Protection of Minor Shareholders and General Investors’ Rights and Interests

(1)

Amendment to the FSCMA in relation to prior disclosure rule on listed company insiders’ stock trading

At the plenary session of the National Assembly on December 28, 2023, the National Assembly passed a proposed amendment to the FSCMA, which requires any officer (including de facto officers such as the director/auditor and people giving work instructions) or major shareholder (based on 10% or more shareholding or practical influence) of a listed company who trades stocks issued by such company in excess of a certain prescribed amount to publicly disclose in advance certain transaction details, including the purpose of the relevant transaction, the terms (price and quantity) of the relevant transaction, and the period of transaction (the “Proposed Amendment”). The Proposed Amendment will take effect as of July 24, 2024.

Moreover, legislation of a proposed amendment to the Enforcement Decree of the FSCMA to specify the matters (i.e., scope, procedures and methods of prior disclosure, etc.) delegated by the Proposed Amendment was pre-announced on February 29, 2024, and the details are as follows:

①	Specification of the scope of application of the prior disclosure obligation. The Proposed Amendment requires officers and major shareholders to comply with the prior disclosure obligation, while also providing that certain exceptions would be set forth under the Enforcement Decree of the FSCMA. According to the Proposed Amendment, financial investors, including pension funds and foreign investors deemed to be financial investors, would be exempt from the prior disclosure requirement.
②	Specification of the scope and types of transactions exempted from the prior disclosure obligation. Regarding transactions that are exempted from the prior disclosure obligation, the Enforcement Decree of the FSCMA provides that sales/purchases pursuant to laws and regulations, applications for tender offers, transfers under share transfer contracts involving a change of the largest shareholder (including accompanying or subsequent transactions), acquisitions and disposals according to split-offs/mergers, and sales by major shareholders to secure funds for yearly tax installment payments under the Inheritance Act and Gift Tax Act would be deemed to be unavoidable payments, and the prior disclosure obligation would not apply. Additionally, the decree states that the prior disclosure obligation would not be required with respect to transactions of the following size: the aggregate of the transactions undertaken in the past six months is (i) less than 1% of the total number of issued stocks of the relevant listed company, and (ii) under KRW 5 billion.
③	Procedures and methods of prior disclosure. The Proposed Amendment requires an insider with the obligation to implement prior disclosure to report his/her transaction plan to the Securities and Futures Commission (the “SFC”) and the KRX. The SFC and KRX will disclose this information, and the procedures and details of the “transaction plan report” will be outlined in the Enforcement Decree of the FSCMA. The proposed amendment to the Enforcement Decree of the FSCMA provides that the “transaction plan report” should (i) indicate the expected price, quantity and period of transaction, and (ii) be made at least 30 days prior to the date of commencement of the relevant transaction. In addition, the Enforcement Decree of the FSCMA provides that the actual transaction amount should not exceed a deviation of 30% from the figures stated in the corresponding “transaction plan report.”

(2)

FSC’s meeting on M&A system improvement

On February 6, 2024, the FSC announced its plan to improve M&A-related systems (Link) during a meeting focused on enhancing ordinary shareholders’ rights and interests. Following such meeting, the FSC distributed a press release on March 4, 2024, specifying its plan for pre-announcement of the legislation of the proposed amendments to the Enforcement Decree of the FSCMA and the Regulations on Issuance and Disclosure of Securities (“Issuance Disclosure Regulations”) (Link). The details are as follows (both are to be enacted as of July 24, 2024, which is also the date on which the Proposed Amendment would be enacted).

①

Requirement for the board of directors to prepare a written opinion, and disclose such opinion. Currently, background information relating to mergers is not being sufficiently provided, despite the disclosure of the report on key business matters together with the securities registration statement. Accordingly, the proposed amendment to the Enforcement Decree of the FSCMA includes the following requirements: a company’s board of directors must prepare a written opinion that includes the purpose of the merger, expected effects, appropriateness of the price/terms, and if applicable, details of any director’s opposition to the transaction. Additionally, the proposed amendment of the Issuance Disclosure Regulations mandates that this opinion be attached to the relevant report on key business matters or securities registration statement concerning the merger.

②

Improvement to the external valuation system. To ensure fairness and reliability of external valuation, the proposed amendment to the Enforcement Decree of the FSCMA requires external evaluation agencies to prepare “quality control regulations” as their rules of conduct. In addition, particularly taking into consideration the concern about fairness in cases of mergers between affiliates, the Enforcement Decree of the FSCMA provides that when appointing an external valuation agency in relation to such mergers, approval or resolution by the audit committee should be obtained first. Furthermore, the proposed amendment to the Issuance Disclosure Regulations prohibits an external valuation agency from simultaneously performing services in relation to merger price calculation and services in relation to valuation.

③

Improvement to the regulations with respect to merger price calculation. Considering the detailed method of calculating merger prices governed by current capital market laws and regulations, corporate governance restructuring through autonomous negotiations is discouraged. In light of this, the proposed amendment to the Enforcement Decree of the FSCMA allows for flexibility in the calculation of fair market prices for mergers between non-affiliated entities. This flexibility is based on the premise that there will be stronger disclosure requirements for mergers and mandatory external valuations. Consequently, parties involved can autonomously determine merger prices through negotiations.

That said, the aforementioned calculation method specified in the FSCMA would continue to be applicable to mergers between affiliated companies, due to concerns that otherwise, decisions may be made at the discretion of major shareholders to the detriment of ordinary shareholders.

It is understood that the above-mentioned improvement measures would be applied not only to merger transactions, but also to other governance reform transactions (i.e., split-off, split-off with merger, comprehensive exchange/transfer of stocks, transfer of important businesses or assets). The FSC aims to have the proposed amendments of the Enforcement Decree of the FSCMA and the Issuance Disclosure Regulations enacted in the third quarter of 2024, after the pre-announcement of the legislation by April 15, 2024, examination by the Ministry of Government Legislation, and resolution by the State Council.

(3)

Discussions to amend the Korean Commercial Code to protect minority shareholders’ rights and interests

In the panel discussion for public livelihoods among relevant Government agencies, including the FSC and the Ministry of Justice, on January 17, 2024, comprehensive system improvement measures to create investor-friendly capital markets were discussed, along with a potential amendment to the Korean Commercial Code to protect minority shareholders’ rights and interests as one of the specific systemic improvement measures that may be undertaken (Link).

Specifically, the following measures were proposed: (i) strengthening directors’ accountability by specifying directors’ damage compensation liability to their misappropriation of business opportunities, (ii) introducing the electronic general meeting of shareholders for minority shareholders’ convenient participation in the general meeting of shareholders and improving the record date system to ensure that actual stock owners’ intentions are properly reflected, and (iii) granting appraisal rights to dissenting shareholders in cases of unlisted companies’ split-offs as well.

Specifically in relation to dissenting shareholders’ appraisal rights in split-offs, the Ministry of Justice’s proposed partial amendment to the Korean Commercial Code (the legislation was pre-announced in 2023) also included a provision whereby “if the total amount of assets being transferred by a company subject to a spin-off pursuant to a vertical spin-off or vertical spin-off with merger exceeds 10% of the total asset amount of the company subject to a vertical spin-off or vertical spin-off with merger prior to the vertical spin-off or vertical spin-off with merger, relevant dissenting shareholders would be granted appraisal rights.” At the time of the pre-announcement of legislation, the Ministry of Justice announced that it was proceeding with relevant procedures to enforce the proposed amendment to the Korean Commercial Code in 2024. Accordingly, we advise companies contemplating corporate governance restructuring transactions, such as spin-offs and spin-offs with mergers, to keep abreast of the result of the examination by the National Assembly’s plenary session and the subsequent promulgation of relevant laws and regulations.

Discussions regarding the foregoing measures for system improvement are expected to continue, aiming to prevent system abuse for the purpose of expanding major shareholders’ control, and to protect the rights and interests of minority shareholders and general investors.

[Korean Version]

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