Mandatory Disclosure of Shareholder Protection Policies in Corporate Governance Reports During Physical Spin-offs

[Asia Economy Reporter Lee Jung-yoon] The Financial Services Commission announced on the 6th that it will revise the Corporate Governance Report guidelines in response to increasing demands for shareholder rights protection when ownership structures change due to physical division of listed companies, and the expansion of mandatory disclosure targets for corporate governance reports starting this year.

The corporate governance report disclosure system refers to a system where listed companies disclose their compliance with core corporate governance principles and explain reasons for non-compliance, thereby encouraging voluntary improvement of management transparency. It was first introduced as a voluntary disclosure by the Korea Exchange in March 2017 and has been mandatory since 2019 for KOSPI-listed companies with assets of 2 trillion won or more. From this year, the disclosure obligation has been expanded to all KOSPI-listed companies with assets of 2 trillion won or more.

This revision introduces new shareholder protection principles related to physical division. There have been opinions that when a parent company's core business division is separated and listed as a subsidiary through physical division, minority shareholders suffer from infringement of rights and stock price decline. Accordingly, detailed principles have been added to the corporate governance report requiring companies to describe policies for shareholder protection when ownership structures change due to physical division, mergers, etc. Companies must establish and disclose policies for protecting minority shareholders, such as collecting their opinions and protecting dissenting shareholders’ rights during ownership changes, and if no such policies exist, explain the reasons and future plans. Communication items with shareholders now separately include communication with minority shareholders to actively provide important information.

Additionally, when there is a comprehensive board resolution on internal transactions with affiliates or self-dealing with executives and controlling shareholders, companies are required to actively explain the details and reasons to shareholders. There have been cases where internal and self-transactions requiring prior board approval were approved comprehensively for multiple transactions by setting periods and limits. In such cases, shareholders find it difficult to understand the reasons and details of the comprehensive board approval.

The revision also stipulates that compliance with principles will only be recognized when the main contents of CEO succession policies are documented clearly in the corporate governance report. For newly obligated companies, if there are plans to establish an audit committee, they must describe this to encourage strengthening internal controls.

Other clarifications to the corporate governance report standards include: clearly stating whether notice was given four weeks before the shareholders’ meeting; recognizing principle compliance only when actual evaluations of outside directors’ activities are recorded; counting only face-to-face or video meetings for the number of meetings and consultations related to external auditor appointments and communications; and adding age and gender ratio items to diversify board composition.

This revision will apply from the end of May, the submission deadline for this year’s corporate governance reports. The Korea Exchange and the Korea Listed Companies Association plan to provide guidance and training on major revisions and offer customized education and consulting for newly disclosing companies. Additionally, in the second half of this year, they will conduct inspections of corporate governance report disclosures based on the revised guidelines.