The FSC introduced a plan to improve the rights and interests of general shareholders in IPOs of split off subsidiaries in order to help restore fairness and trust in the capital markets and strengthen investor protections.

Background

With some companies recently deciding to split off rapidly growing portions of their business and went ahead with IPO of split off subsidiaries within a short period of time, the issue of general shareholders incurring losses has become problematic as their shareholder rights are stripped away and stock prices for the parent company tend to decline. Unlike in a spin off, shareholders of the parent company in a split off are not allocated with stocks of a split off subsidiary and therefore they have no shareholder rights over the split off company. There is also a study suggesting that the valuation of the high growth split off business section is not necessarily reflected in the valuation of parent company stocks.

Especially, the fact that the rights of general investors who have been opposed to the split off decision are not adequately protected has presented an ongoing problem which has also been closely related to the so-called Korea discount phenomenon. As an equity interest, a stock’s worth largely consists of a right to participate in the decision making process and a right to make a claim on present and future profits. However, in a capital market where these two principles are not properly observed, it will be difficult for investors to have high levels of confidence.

Therefore, as one of the key policy tasks of the new administration for restoring fairness and trust in capital markets, the financial authorities have prepared the following measures to improve the rights and interests of general shareholders in IPO of split off subsidiaries after months of engaging in discussions with experts and relevant stakeholders.

Key Details

I. Strengthen Disclosure

Companies planning to carry out a split off of their business should disclose specific purpose of split off (e.g. business restructuring, sale, listing, etc.) and investor 

protection measures through their material information report (within three days after board decision for split off). In particular, if there are plans for a post-split off IPO of a subsidiary, disclosure should be made on expected schedule, etc. and if there are any changes to the IPO plan, a corrective disclosure should be filed.

II. Introduce the Right to Request Stock Purchase

Shareholders of listed companies who have been opposed to the company’s split off decision will have the right to request that the company purchase his/her shares. Shareholders who voted against the split off decision at a general meeting for deciding the prospects of a split off can sell their shares at a price determined prior to the split off set in motion.

III. Bolster Listing Review Process

When companies plan to list their subsidiaries within five years after the split off, the Korea Exchange (KRX) will review the parent company’s efforts at protecting general investors, and an IPO will be restricted if the parent company’s efforts are found to be insufficient. This enhanced listing review process will also apply to companies that have completed a split off of a subsidiary within five years even before the revision to the KRX listing standards takes place. In addition, there will be detailed suggestions about specific shareholder protection measures that companies can choose as well as examples of insufficient cases on the KRX’s listing guidebook, thereby increasing predictability for companies and ensuring implementation of effective shareholder protection measures.

Expectation

The three-levels of safeguards are expected to form the basis upon which businesses give an adequate consideration for the rights and interests of general shareholders in the process of pursuing a split off of a subsidiary.