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/ Financial Services Commission

Financial authorities will tighten dual-listing requirements for physically split-off subsidiaries in order to protect the rights and interests of parent company general shareholders. Starting next month, if a physically split-off subsidiary seeks to go public, it must obtain mandatory approval from parent company shareholders, and the "3% rule"—which limits the voting rights of controlling shareholders—will be applied during the shareholder consent process.

The Financial Services Commission announced on July 31 that it approved amendments to the Korea Exchange's listing and disclosure regulations to improve the dual-listing system during its regular meeting. The revised regulations and dual-listing guidelines will take effect on August 3.

This system improvement focuses on reducing the problem of parent company general shareholders' stock value being diluted in the process of raising funds through subsidiary listings. Going forward, companies pursuing dual listings will undergo scrutiny not only regarding the operational and managerial independence of the subsidiary, but also on whether the parent company's board of directors fulfilled its duty to protect shareholders and the adequacy of shareholder protection measures.

In particular, shareholder approval from the parent company will become mandatory for the dual listing of physically split-off subsidiaries. For general subsidiaries, receiving shareholder approval creates a presumption that shareholder protection requirements have been met; however, if approval is not obtained, they must undergo strict individual review by the exchange. Subsidiaries that account for a low proportion of the parent company will be excluded from the shareholder approval requirement.

When determining whether shareholder consent has been obtained, the 3% rule will be applied as previously announced. Shareholders holding voting rights exceeding 3% will have their voting rights capped at 3%, and for the largest shareholder, holdings of specially related parties will be aggregated. To be recognized as having obtained shareholder consent, a majority of participating shares in the vote and at least one-quarter of total issued shares must vote in favor.

The business and investment sectors presented opposing views during the opinion-gathering process. The business community argued that shareholder consent should be exempted if a significant period has elapsed since the physical split-off, and that ordinary resolution methods should be applied instead of the 3% rule. On the other hand, the investment industry demanded that shareholder consent be made mandatory not only for physical split-offs but for all dual listings having a significant impact on the parent company, and that a Majority of Minority voting method targeting only minority shareholders be applied.

The Financial Services Commission and the Korea Exchange maintained core provisions, including mandatory shareholder consent for physically split-off subsidiaries and the 3% rule, as originally announced. They considered that applying ordinary resolution methods risks securing shareholder consent solely through the controlling shareholder's intent, while Majority of Minority voting has no precedent of adoption in South Korea.

Instead, independence requirements for special committees within parent company boards of directors were strengthened. Special committees must have an independent director serve as chairperson while independent directors and independent external members make up at least two-thirds of total members. Previously, satisfying either one of the two requirements was sufficient, but the final version mandates fulfilling both requirements.

In the shareholder consent process, the use of electronic voting will be recommended. When low-proportion subsidiaries do not undergo shareholder approval, they may concisely disclose only whether they meet the threshold and their proportion. Final resolution details of parent company boards of directors were also adjusted to disclose only overall board voting outcomes rather than individual directors' approval or opposition opinions.

Listings of investment trust securities, such as Real Estate Investment Trusts (REITs), are excluded from the scope of the dual-listing system.

Following implementation of the system, the Financial Services Commission and the Korea Exchange plan to periodically supplement guidelines based on actual parent company board duty fulfillment cases and exchange review results.

                                                                                                          Park Joo-yeon