South Korea’s top financial regulator said Monday it would seek to revise the Capital Market Act to protect individual shareholders when listed companies undertake a merger and relist after a corporate spin-off.
"We prepared a proposal for the revision of the Capital Market Act with the recognition that the protection of the interests of general shareholders should be strengthened to enhance the value of the capital market," Kim Byoung-hwan, chair of the Financial Services Commission, said during a press briefing held at the Government Complex Seoul.
The FSC chair said the revised bill will be submitted to the National Assembly as early as this week after consulting with the ruling party.
At the heart of the amendment proposal put forward by the regulator is the improvement of corporate governance and the enhancement of transparency of the decision-making process.
The government seeks to provide safeguards to minority shareholders who have disregarded their interests unfairly in financial transaction cases, which could be exemplified by LG Energy Solution’s spin-off from LG Chem in 2020 and the merger attempt between Doosan Bobcat and affiliate Doosan Robotics this year.
The push for revising the Capital Market Act came as a compromised version after the ruling and main opposition party locked horns over the push to amend an article of the Commercial Act, designed to expand the responsibilities of a company director not only to the interest of the firm but also to the interest of the shareholders.
The main opposition Democratic Party argued that there should be a rule mandating company directors to consider the benefits of general shareholders' interests. The ruling People Power Party argued that such a restriction would hurt corporate autonomy.
If amended, the Commercial Act will affect some 1.02 million companies, including those unlisted, while some 2,400 listed companies will be subjected to the revised Capital Market Act.
“Since the Commercial Act is a general law that applies to all companies including mid and small sized ones, it can have significant unintended side effects, so I hope that the amendment to the Capital Markets Act will be discussed more intensively in the National Assembly as an alternative,” Kim said.
“It may seem like it (the revision of the Capital Market Act) is a limited action, but if you look at the major cases, most of the general shareholder protection problems occurred in financial transactions.”
Under the proposed rule, when a listed corporation engages in capital transactions such as merger or spin-off, sale and transfer of shares, or transfer of major operations, the board of directors must strive to protect the legitimate interests of shareholders by disclosing their opinions on the purpose of the envisioned merger, the appropriate amount of cost involved and expectation on the business impact of the deal.
In the event of a merger and acquisition, listed firms will be required to determine the appropriate price of the proposed merger and acquisition by considering various factors such as stock price, asset value and profit value. Currently, listed corporations must calculate the merger price by discounting or adding 10-30 percent to the market price.
The FSC said the new method of calculating merger prices would reflect the actual value of the company by moving away from a uniform formula.
Businesses will be obligated to have a third-party agency to evaluate the price of a merger and disclose the evaluation findings.
Regulations on the listing of a spun-off subsidiary will also be strengthened.
When a company’s subsidiary goes public after a spin-off, the parent firm’s general shareholders will have a priority claim to 20 percent of the IPO shares of the subsidiary.
Financial authorities plan to induce listed companies to implement sufficient protection efforts for general shareholders of parent companies by extending the monitoring period from the current 5 years to an indefinite period.
