Public firms face tighter regulations on spinoffs and double listings

The Financial Services Commission (FSC) and the Korea Exchange (KRX) jointly announced a revision to their corporate governance report guidelines on Sunday. 

Starting in May, certain public companies that wish to carve out a business unit to create a new entity and create a double listing on the Korea Exchange must provide a minority shareholder protection clause in their annual corporate governance report. 

The revision applies to all Kospi-listed companies with over 1 trillion won ($822 million) in assets. 

The creation of a new accounting entity from an existing company's department is a popular spinoff tactic used in South Korea, Japan and Taiwan. The parent company still keeps 100% ownership of the new affiliate.

The protection clause needs to encompass whether the company listened to the opinions of the minority shareholders and how it plans to protect the rights of dissenting opinion holders. 

Even if the listed company does not follow through with the measures stated in the reports, however, they will not be subject to the full penalty of law.

LEGAL FRAMEWORK 

As such, Seoul will prepare a legal framework separate from the guideline – meaning it will regulate the negative side effects from such spinoffs by law. 

As early as next month, the Financial Services Commission plans to announce the basics of the new legal framework after close consultations with experts, related organizations and industry insiders. 

“While we devise a way to improve the system's fundamentals, our priority will be on encouraging companies and shareholders to adjust their interests themselves,” Seoul’s top financial watchdog said. 

With only a month left until the legal framework is established, why did the FSC rush to announce the guidelines on Sunday?

To the dismay of minority shareholders, South Korean conglomerates have carried a number of such spinoffs in recent years.

The differing – sometimes heated – opinions on these corporate actions have made headlines in the world's 10th-largest economy.

Since 2020, Kospi's large-cap companies have taken advantage of the bullish stock market for financing.

The companies said such spinoffs and the following double listings on the Kospi are the only ways they can raise large amounts of funds without diluting the controlling shareholder's shares. They claimed initial public offerings are integral to starting new businesses.

Minority shareholders, for their part, said they are victims of such decisions after shares of some parent companies have plummeted since creating wholly owned affiliates and listing them on the same stock exchange. 

Because of the nature of spinoffs that create an affiliate from an existing business department, the current shareholders of the parent company are not eligible for the new entity’s stocks. 

For example, when LG Chem Ltd. launched its battery affiliate dubbed LG Energy Solution Ltd. in late 2020, the shareholders of the parent company did not receive any stocks in the new entity.

Minority shareholders have complained that such corporate splits and the following double listings are part of an illogical system unaligned with international protocols. 

These are some of the measures currently being discussed by the industry: granting shares of newly listed affiliates to existing shareholders of the parent companies; giving priority access to the affiliates’ initial public offerings to shareholders of the parent firms; and giving appraisal rights to dissenting shareholders. 

Ahead of the eighth presidential election slated for March 9, candidates have shared how they would revise the regulations on the controversial practice.

South Korea’s top financial regulator also announced measures for more stringent corporate disclosure – such as requiring companies to share in detail their policies and methods for choosing chief executives. 

Previously, public firms only had to list the procedures they use to select their top managers. 

Going forward, a company needs to detail the status of its chief executive succession policy in its governance report; inclusive of how it selects the candidates and operates the training and evaluations for them. 

The Corporate Governance Report Disclosure System was first introduced in March 2017 targeting Kospi-listed companies to improve transparency in corporate management and to reinforce market vigilance upon public companies.  

Since 2019, listed companies of at least 2 trillion won in assets have been required to submit and disclose their corporate governance reports to the KRX.

From this year, listed companies of at least 1 trillion won in assets are subject to the requirement. 

Seoul plans to subject all listed companies to the disclosure system by 2026. 

Write to Eui-Myung Park at uimyung@hankyung.com
Jee Abbey Lee edited this article.