The Financial Services Commission and the Korea Exchange proposed details of the rules and guidelines on split listing (also known as duplicate listing involving a parent company and its subsidiary) on July 6. The proposed guidelines have been prepared after having numerous seminars and taking into account opinions and suggestions from various stakeholders.

The practice of split listing has been more or less prevalent in Korea more so than in other countries abroad despite concerns over harm to shareholder interests. In this regard, the parent company’s board of directors and controlling shareholder had made no particular efforts in the past to ensure the protection of parent company’s shareholders as the decision to list a subsidiary company had been treated as a matter for the subsidiary company’s board of directors to decide on. Relevant rules on split listing had also remained inadequate to ensure effective protection of shareholder interests.

Against this backdrop, the FSC and the KRX have established new requirements for the parent company’s board of directors and drawn up new listing review criteria to prohibit split listings that are asymmetrical in nature and that fail to ensure adequate consideration of the interests of the parent company’s shareholders. The proposed rules and criteria are for the screening of split listing on top of the general listing rules and criteria. These rules and criteria have been prepared based on the fiduciary duties for all shareholders specified under the Commercial Act and after taking into account relevant rules on split listing in overseas countries (Hong Kong and Taiwan) and a judicial precedent regarding the fiduciary duty of board of directors in the state of Delaware in the U.S. Under the newly proposes rules and criteria, the parent company’s board of directors or shareholders will determine the appropriateness of split listing and whether there is any harm to the interests of the parent company’s shareholders first before having a final review carried out by the KRX.

Key Details

Split listing rules: Scope of application

The rules on split listing will apply to cases where an unlisted company that is under control or a subsidiary of a listed parent company—in which case the two companies can be seen as the same legal entity in essence—goes for a listing on an exchange. More specifically, the relationship shows a vertical control or ownership of a subsidiary company by a parent company as specified under the Act on External Audit of Stock Companies and an affiliated company of a parent company as specified under the Monopoly Regulation and Fair Trade Act. The vertical ownership standard is minimum 20 percent of share ownership in an affiliated company for parent company, or more than 50 percent of share ownership in a second-tier subsidiary company (grandson company) for affiliated company.

Five specific duties for parent company’s board of directors

The parent company’s board of directors will be subject to the five specific duties that spell out in detail the fiduciary duties for all shareholders specified under the Commercial Act as shown below.

a) Should examine the potential impact of split listing on shareholders.

b) Should prepare shareholder protection mechanisms through dividends in kind, retirement of treasury shares, etc.

c) Should communicate with shareholders based on and about the impact assessment and shareholder protection measures to confirm shareholder opinions (assent or dissent) and obtain a clear consent from shareholders through a shareholder meeting if necessary.

d) Should draw a formal voting record of the board of directors and notify results to the subsidiary company.

e) Should disclose the proceedings at each stage of undertaking these duties. In the third step, if the board of directors has not been able to confirm clear opinions from shareholders via a shareholder meeting, it should also disclose specific reasons for that.

To ensure fairness in the implementation of these duties, the parent company’s board of directors will be required to set up an independent special committee to carry out a preliminary screening, deliberation, and approval process. These five specific duties for parent company will equally apply to when a listed parent company attempts to list its subsidiary company on an overseas exchange.

Strict rules for granting exemptions on split listing

There will be strict rules for granting exemptions on split listing. In this regard, the independence of subsidiary company from its parent company in terms of operating and managing its own business affairs should be recognized. If the subsidiary company’s core business area is highly dependent on the parent company, or if key management decisions for the subsidiary company are practically made by the parent company, it cannot be said to have satisfied the independence requirement. In addition, there will be specific requirements for protecting the shareholders of parent company. Aside from the five specific duties mentioned above and the board of director’s final approval, there will be further screening of efforts to ensure adequate shareholder protection measures. In this regard, obtaining consent from shareholders is recommended in principle as it is a clear way of demonstrating a sufficient level of efforts for shareholder protection. In obtaining consent from shareholders, the 3 percent voting cap (so-called “3 percent rule”) will apply as in the case for appointing audit committee members under the Commercial Act.

Additionally, when listing a split-off subsidiary, the parent company will always need to obtain consent from shareholders. In other cases of split listing, it will be considered to have satisfied the shareholder protection requirement if the parent company has obtained consent from shareholders, but without obtaining shareholder consent, the parent company’s efforts for shareholder protection will be subject to strict scrutiny. For the listing of a subsidiary company whose sales, operating profits, and assets amount to less than 10 percent of those of the parent company, it will be considered to have satisfied the shareholder protection requirement if the parent company’s board of directors has faithfully implemented the five specific duties mentioned above and reached a final decision to do so.

Schedule

The proposed KRX rules change and guidelines on split listing will enter a comment period from July 7 until July 14 and go through a successive approval process before taking effect.

* Please refer to the attached PDF for details.