Convertible Bond Call Option Targets Must Be Disclosed... Unrestrained Refixing Also Restricted

Financial Services Commission Announces Regulation Change Notice
Amendments to Take Effect in Q3

The financial authorities will strengthen disclosure obligations related to issuance and circulation to address concerns about insufficient information on call option exercisers during convertible bond issuance. Additionally, to prevent companies from abusing the convertible price adjustment (refixing) system, exceptions to the refixing minimum limit (adjustment below 70% of the initial conversion price) will only be allowed through a special resolution at the shareholders' meeting (on a case-by-case basis).

On January 27, the Financial Services Commission announced that it would conduct a notice of regulatory changes to the "Regulations on the Issuance and Disclosure of Securities" as a follow-up measure to enhance the soundness of the convertible bond market, following the plan announced on January 23.

The amendment includes strengthening disclosure related to the issuance and circulation of convertible bonds and rationalizing convertible price adjustments. These provisions also apply to bonds with warrants and (redeemable) convertible preferred stocks.

Key points include, first, strengthening disclosure of issuance and circulation of convertible bonds. Currently, when issuing convertible bonds, the exercisers of call options must be disclosed; however, most disclosures only state "the company or a person designated by the company," making it difficult for investors to identify the call option exercisers. The amendment requires companies to disclose the exercisers of call options or when call options are transferred to a third party through a major event report.

Concerns have been raised that convertible bonds acquired before maturity could be resold to major shareholders and then converted into stocks, potentially being exploited for unfair trading in the capital market. Although resale of convertible bonds before maturity is essentially similar to new issuance, sufficient information has not been provided to the market. To address this, the amendment requires companies to disclose acquisition and handling plans through a major event report when acquiring convertible bonds before maturity. For example, reasons for pre-maturity acquisition and future handling methods (such as cancellation or resale) will be reflected in the corporate disclosure form preparation standards.

Second, the amendment rationalizes convertible price adjustments (refixing). Currently, the minimum limit for conversion price adjustment due to market price fluctuations is generally set at 70% or more of the initial conversion price, with exceptions allowed through a special resolution at the shareholders' meeting or the articles of incorporation to set it below 70%. However, some companies have applied exceptions for general purposes (such as simple fundraising or asset acquisition) using the articles of incorporation. The amendment allows exceptions to the refixing minimum limit (adjustment below 70% of the initial conversion price) only through a special resolution at the shareholders' meeting (on a case-by-case basis).

Unlike conversion price adjustments due to market price fluctuations, adjustments due to capital increases or stock dividends can be freely determined by the issuing company's board resolution, leading to cases where some companies excessively lower the conversion price. To improve this, the amendment stipulates that when the value of conversion rights is diluted due to capital increases or stock dividends, the conversion price can only be lowered to an amount reflecting the dilution effect or higher.

Furthermore, the amendment clearly regulates the reference date for calculating the conversion price of private placement convertible bonds. Currently, the conversion price for private placement convertible bonds is generally calculated based on the day before the board resolution for issuance. However, some companies have delayed the payment date until the stock price rises after calculating the conversion price, thereby avoiding fair reflection of the market price. Accordingly, the amendment requires that the reference market price on the "actual payment date" be reflected fairly in the conversion price calculation for private placement convertible bonds.

The Financial Services Commission stated, "The amendment was prepared through discussions with academia, private experts, economic organizations, and related institutions such as the Financial Supervisory Service and the Korea Exchange. We expect it to be an opportunity for the convertible bond market to regain investor trust and develop as a sound fundraising method for companies."

The amendment will be open for public comment from June 28 to June 11. Afterward, it will undergo review by the Regulatory Reform Committee, approval by the Securities and Futures Commission and the Financial Services Commission, and is expected to be implemented in the third quarter.