Recently, the Korean Government and supervisory authorities have actively discussed various institutional improvements to address the so-called “Korea Discount” issue by protecting minority shareholders and other stakeholders of listed companies.
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.
1.
Discussions on Institutional Improvements Aimed at Enhancing Corporate Value and Creating an Investor-Friendly Capital Market
(1)
Announcement of Guidelines to Support the Establishment and Disclosure of “Corporate Value Enhancement Plans” by Listed Companies
The Government announced the “Corporate Value-Up Program” in January 2024 to overcome the phenomenon of listed companies’ stock prices being undervalued compared to actual corporate value and to improve the market assessment of companies. Subsequently, the FSC announced the “Corporate Value-Up Support Measures” on February 26, 2024 and conducted the “Meeting with Institutional Investors on Corporate Value-Up Support Measures” on March 14, 2024. Moreover, it announced incentive provision plans for exemplary participating companies in a separate accounting and dividend sector meeting on April 2, 2024. On May 1, 2024, based on the opinions of industry experts, including relevant corporations, investors and members of the academia, the FSC finalized and announced the “Guideline Commentary on the Establishment and Disclosure of Corporate Value Enhancement Plans” (the “Commentary”).
According to the Commentary, individual companies are encouraged to autonomously draft their own “Corporate Value Enhancement Plans” tailored to their specific characteristics and disclose it periodically on a yearly basis using the Korea Exchange’s electronic disclosure system (the “KIND”) as a voluntary disclosure item. Furthermore, the Commentary provides that companies can utilize (i) templates and key performance indicators provided as examples in the Commentary, (ii) financial indicators related to shareholder returns, such as dividend payment ratios and share repurchase and cancellation policies, and (iii) non-financial indicators, including measures to ensure the expertise, accountability and diversity of the board of directors, or the independence and expertise of external auditors, each as set forth in the Guidelines on Corporate Governance Reports, thereby granting companies the flexibility to autonomously draft their own Corporate Value Enhancement Plans.
While the introduction of the Corporate Value Enhancement Plans is part of the Government’s efforts to create an investor-friendly capital market, such plans are also used to provide various incentives, including reductions in accounting and disclosure penalties, preferential inclusion in indices and support with respect to investor relations (“IR”), to exemplary participating companies in the Corporate Value-Up Program. This approach aims to incentivize companies to voluntarily establish, implement and communicate to the market their Corporate Value Enhancement Plans, thereby ensuring proper market evaluation and attracting investment for these companies.
Furthermore, we understand that the governmental authorities are committed to actively supporting companies and investors by ensuring the smooth implementation of the initiatives outlined in the tasks set forth in the Corporate Value-Up Support Measures previously issued. These initiatives include (i) awarding exemplary companies, (ii) announcing tax support measures for value-up plans, (iii) developing the Korea Value-Up Index, and (iv) listing ETFs within the year.
(2)
The FSS’s Roundtable Meeting to Promote Mutual Growth and Development for Corporations and Shareholder Activist Organizations
On April 18, 2024, the Financial Supervisory Service (the “FSS”) held a roundtable meeting to consider joint efforts between shareholder activist organizations and companies to foster mutual growth and development, in light of increasing shareholder activism in recent years. During the meeting, the Governor of the FSS stated that shareholder activist organizations, which have recently been actively intervening in corporate management, should present long-term growth strategies to both companies and shareholders.
Given the recent achievements of shareholder activism in Japan, global activist funds are actively entering the Korean market. According to the FSS, the number of companies targeted by shareholder activism in Korea has risen, with shareholder proposals increasing from 59 cases across 26 companies in 2020 to 93 cases across 40 companies this year. Additionally, activist funds have used the Investor-State Dispute Settlement (the “ISDS”) mechanism to claim compensation for investment losses from companies.
In this context, during the roundtable meeting, the Governor of the FSS highlighted that shareholder activism focused solely on short-term profits could impede a company’s long-term growth drivers. Therefore, companies that plan to carry out governance restructuring should communicate with shareholders and investors, including shareholder activist funds, while taking into consideration the stance of financial authorities regarding shareholder activist funds and related regulatory trends.
2.
Discussions on Institutional Improvements Aimed at Protecting Interests of Minority Shareholders and General Investors
(1)
Enhancing Disclosure Obligations in Relation to Status of Exercise of Shareholder Proposal Rights and Details of Items Discussed in Shareholders’ Meetings
With the increasing exercise of shareholder proposal rights by minority shareholders, including shareholder activist funds, there have been growing concerns that rational decision-making by investors has been hindered from the lack of proper disclosure of information in shareholder proposals (as a result of a lack of clear disclosure guidelines). To address these concerns, the FSS has revised its disclosure form to ensure that information related to shareholder proposals is comprehensively recorded in periodic reports submitted before and after the general meetings of shareholders. Below is a summary of the revisions:
①
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.
②
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.).
③
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:
(i)
If the agenda item has been proposed by a shareholder, an explanation of the proposal by such shareholder;
(ii)
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
(iii)
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.
The revised disclosure form took effect on April 12, 2024. Companies required to submit business reports under the FSCMA must now include (i) details of shareholder proposals and other minority shareholder rights exercised during the relevant period of disclosure (including cases where such rights were exercised between the record date for the disclosure document and the submission date), (ii) the purpose of exercise, and (iii) the status of such exercised rights in their quarterly and semi-annual reports.
(2)
Enhancing Disclosure Obligations Related to Convertible Bonds
The FSC recently issued a preliminary notice of amendments to the Issuance and Disclosure Regulation to (i) address the lack of transparency in the issuance and distribution processes for convertible bonds by strengthening market oversight and controls with respect to companies, and (ii) protect the interests of general investors from being compromised through excessive issuance of convertible bonds. Following the public comment period for the notice, which lasted until June 11, 2024, the FSC plans to implement the amendments in the third quarter of this year. An overview of the proposed amendments is as follows:
①
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.
②
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.
③
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.
④
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.
(3)
Notices of Amendments to Enforcement Decree of FSCMA and the Issuance and Disclosure Regulation for Institutional Improvements Regarding Treasury Stock of Listed Companies
On June 4, 2024, the FSC announced amendments to the Enforcement Decree of the FSCMA and the Issuance and Disclosure Regulation and issued legislative and regulatory amendment notices. These amendments follow the “Plan for Institutional Improvements for Treasury Stock of Listed Companies” announced by the FSC on January 30, 2023. Following the public comment period for the notices, which was set to last until July 16, 2024, the FSC plans to implement the amendments in the third quarter of this year. An overview of the proposed amendments is as follows:
①
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.
②
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.
③
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.
Going forward, as information available to shareholders and investors increases with expanded disclosures of information related to the Corporate Value Enhancement Plans, exercise of shareholder proposal rights, and convertible bonds and treasury stock, there is a higher likelihood that activist shareholders and minority shareholders will actively voice their opinions on improving undervalued stock prices or make shareholder proposals on increasing shareholder returns and reallocating capital. Consequently, the importance of communication with shareholders is expected to grow, requiring caution in the issuance of disclosures, operation of general meetings and acquisition or disposal of convertible bonds or treasury stocks.