News and developments
Trends in Institutional Improvements Aimed at Enhancing Corporate Value and Protecting Shareholder Value
Discussions on institutional improvements aimed at enhancing corporate value and creating an investor-friendly capital market include (i) the announcement of the Government’s “Corporate Value-Up Program” in early 2024, followed by the guidelines on establishing and disclosing plans for enhancing corporate value published by the Financial Services Commission (the “FSC”) around May 2024, and (ii) the recent roundtable meeting organized by financial authorities to promote mutual growth between corporations and shareholder activist organizations, among others, taking into consideration the increased activity of shareholder activist funds in recent years.
Meanwhile, authorities introduced institutional improvements to protect the interests and shareholder value of minority shareholders and general investors by (i) strengthening disclosure obligations related to shareholders’ meetings of listed companies through amendments to the Regulation on Securities Issuance and Disclosure (the “Issuance and Disclosure Regulation”), (ii) enhancing disclosure obligations related to convertible bonds by proposing amendments to the Issuance and Disclosure Regulation, and (iii) improving regulations related to the treasury stock of listed companies by proposing amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”) and to the Issuance and Disclosure Regulation.
The key details of the systems and regulations related to corporate governance restructuring that are specifically planned to be introduced or are being discussed by the Government and supervisory authorities are as follows.
- Discussions on Institutional Improvements Aimed at Enhancing Corporate Value and Creating an Investor-Friendly Capital Market
- Discussions on Institutional Improvements Aimed at Protecting Interests of Minority Shareholders and General Investors
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- Exercise of shareholder proposal rights: If shareholder proposal rights have been exercised during the period subject to disclosure, the proposer, the relevant agenda item and the details of such agenda item must be disclosed.
- Processing of the shareholder proposal, including whether it has been adopted as a general meeting agenda: Indication on whether the proposal was included as an agenda item for a general meeting of shareholders’ is required. If the relevant shareholder proposal has been rejected, specific grounds for rejection pursuant to Article 12 of the Enforcement Decree of the Commercial Code must be disclosed. Details on how the shareholder proposal is being processed (i.e., status of the shareholder proposal) also must be disclosed (e.g., when the shareholder proposal was submitted, whether a preliminary injunction has been filed with respect to the listing of the agenda item, etc.).
- Details of discussions during the general meeting of shareholders’ and their outcome: Details of each agenda item discussed during a general meeting of shareholders (ordinary or extraordinary) should be recorded, with an indication on whether each agenda item was proposed by a shareholder. Additionally, key discussion points with respect to each agenda item should be summarized, including:
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- If the agenda item has been proposed by a shareholder, an explanation of the proposal by such shareholder;
- If any Q&A sessions or debates for and against the proposal have taken place during the resolution process, a summary of the key points discussed and conclusions reached; and
- If the agenda item has been partially modified during the meeting, details of the agenda item both before and after the modification and the reasons for the modification.
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- Clarification of the obligation to disclose entities exercising call options: The current regulation requires companies to disclose information of entities exercising call options when issuing convertible bonds. The proposed amendment specifically provides that a company would be required to file material information disclosures when designating entities to exercise call options, or if the right to exercise a call option has been transferred to a third party.
- Mandatory disclosure of reasons for pre-maturity acquisition and future plans for disposition: If an issuing company acquires convertible bonds before maturity and then resells them to the largest shareholder to be converted into shares, the effect of this would be similar to that of a new issuance of convertible bonds, except that unlike in new issuances, sufficient information would not be provided. The proposed amendment requires companies to disclose information related to pre-maturity acquisition and future plans for disposition through material information disclosures when acquiring convertible bonds before maturity.
- Rationalization of conversion price adjustment (refixing): Currently, the minimum threshold for refixing based on market price fluctuations is set to at least 70% of the initial conversion price, with exceptions allowed in cases of (i) a special resolution of the shareholders’ meeting or (ii) through specification in companies’ articles of incorporation. However, since ordinary purposes (i.e., non-exceptional reasons such as simple fundraising and asset purchase) have often been cited in companies’ articles of incorporation as grounds to bypass the minimum threshold level, the proposed amendment stipulates that exceptions would only be applicable with a special resolution (with respect to a specific case) at the shareholders’ meeting.
- Clarification of reference dates for conversion price calculation: With respect to reference dates for calculating the conversion prices of privately offered convertible bonds, the current regulation, in principle, requires it to be the day before the board resolution for issuance of the relevant convertible bond. However, as there have been cases of actual payment dates being delayed until the relevant stock price rises after the conversion price has already been calculated, the proposed amendment clarifies that if the period from the board resolution for the issuance of convertible bonds to the payment date exceeds one month, the reference date for calculating conversion price should be the date the payment is actually made.
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- Restricting the allocation of new shares to treasury stock in the process of a spin-off by listed companies (proposed amendment to the Enforcement Decree of the FSCMA): Considering the criticism that the allocation of new shares to treasury stock during a spin-off is used to strengthen major shareholders’ control, the proposed amendments restrict the allocation of new shares to treasury stock during a spin-off by listed companies. Similarly, in the case of mergers, the proposed amendments prohibit the transfer of treasury stock, as well as the allocation of new shares to the shares of the extinguished company owned by the surviving company or to the treasury stock owned by the extinguished company.
- Enhancing disclosure requirements throughout the course of holding and disposing of treasury stock (proposed amendments to the Enforcement Decree of the FSCMA and the Issuance and Disclosure Regulation): If a listed company holds 5% or more shares of treasury stock of the total number of issued shares, the company must prepare a report detailing the status of treasury stock holdings, the purpose of holding and future handling plans, and then obtain board approval for the report. This report must be submitted as an attachment to the relevant company’s business report, which includes a summary of the report.
- Eliminating regulatory arbitrage in the acquisition and disposal of treasury stock (proposed amendments to the Issuance and Disclosure Regulation): Even in instances where treasury stocks are acquired in trust, or in instances where treasury stocks are disposed of by a trustee during the term of the relevant trust agreement, the disclosure obligations that would apply to direct acquisitions/disposals of treasury stock would apply in an identical manner.