[Controversy Over Re-listing After Demerger]② Exchange 'Strengthens Review' Amid Concerns of Minority Shareholder Stake Dilution

Financial Services Commission and Korea Exchange Strengthen Investor Protection Policy
May Reflect Procedures Such as Collecting Shareholder Opinions During Relisting Review

The Korea Exchange is expected to strengthen its review process by examining investor protection measures for companies that relist after a spin-off. This comes as the Financial Services Commission identified 'investor protection' as one of the key themes in this year's presidential work report. It is part of the capital market investor protection stance that the Financial Services Commission and the Korea Exchange have maintained since last year.

The financial investment industry anticipates that if controversies over spin-off relistings continue to arise, the Exchange will review shareholder protection procedures during the relisting examination, and the financial authorities may prepare specific related measures as early as October. In this year's work report, the Financial Services Commission announced plans to strengthen disclosures related to the acquisition and disposal of treasury shares as one of the capital market policy tasks.

"Treasury shares must be canceled after repurchase"

While treasury share repurchases by listed companies are considered a strong shareholder return policy, this is not the case during spin-offs. In the spin-off process, treasury shares are conveniently used to strengthen the controlling shareholder's power but act as a factor diluting the value of minority shareholders' stakes. A report titled "Spin-offs and the Magic of Treasury Shares," published last month by the Korea Capital Market Institute, also criticized this issue.

Junseok Kim, a researcher at the Capital Market Institute, pointed out, "If the existing company held treasury shares, it is possible during the spin-off process to consider the existing company as a shareholder and allocate new shares of the newly established company accordingly. After the spin-off, the surviving company holds shares of the new company, and as a result, the controlling shareholder can exercise enhanced control over the new company through the shares held by the surviving company they control."

The major shareholder (owner family) can strengthen control over the new company without incurring additional costs by using treasury shares. This is called the "magic of treasury shares." Since this process dilutes individual investors' stakes, there is strong opposition. Therefore, it is argued that alongside treasury share repurchases, a cancellation procedure must follow to ensure shareholder returns.

Sangheon Lee, a researcher at Hi Investment & Securities, stated, "In Korea, from a governance perspective, treasury share repurchases are used as one of the means for controlling shareholders to defend their management rights. During the spin-off process in the transition to a holding company, treasury shares held are treated as assets, leaving the new company's treasury shares with the parent company, automatically forming a shareholding relationship between the two companies without separate share acquisition." He added, "When treasury share repurchases lead to cancellations, it can reduce the possibility of controlling shareholders abusing treasury shares and also enhance corporate governance."

If conflicts between companies and individual investors over spin-offs continue to escalate, it is expected that disclosure of the purpose of treasury share acquisition and disposal will be mandated. This aligns with the Financial Services Commission's first policy task in this year's capital market work report, which is 'advancing the capital market (resolving the Korea discount).' Earlier this year, there were speculations about mandating the cancellation of treasury shares after repurchase, but due to potential strong opposition from companies if enforced by law, the 'mandatory cancellation of treasury shares' option has reportedly been set aside.

For this reason, it is anticipated that the Exchange will review investor protection procedures for companies relisting after spin-offs. Spin-offs require approval by the board of directors followed by a vote at the shareholders' meeting. This involves notifying shareholders in advance before approving the spin-off or establishing procedures to gather shareholder opinions after board approval. A Korea Exchange official said, "If controversies over spin-off relistings intensify, procedural investor protection recommendations such as prior notification of spin-off plans and collection of shareholder opinions may be reflected in the review process."