Preventing Convertible Bond Tricks... Strengthening Disclosure Obligations for 'Call Option Exercisers'

Rationalization of Conversion Price Adjustment
Effective from the 1st of Next Month

The financial authorities are strengthening the disclosure requirements for the issuance and distribution of convertible bonds (CBs) to prevent their misuse in unfair trading practices. Companies must disclose when they designate a call option exerciser (the right to purchase convertible bonds at a predetermined price) or transfer the call option to a third party. The revision also rationalizes the adjustment of the conversion price (refixing) to improve cases of excessive downward adjustments.

The Financial Services Commission announced on the 13th that it approved the amendment to the "Regulations on the Issuance and Disclosure of Securities" at its regular meeting. The amendment will be implemented from the 1st of next month after related agencies and companies prepare, including building a disclosure system.

Convertible bonds are bonds that grant the right to convert into stocks in the future. In South Korea, they are combined with call options and refixing conditions (adjusting the conversion price based on stock price fluctuations) and are used as a major funding source for small and venture companies. However, concerns have been raised that market monitoring and checks do not function properly during issuance and distribution, and that unfair trading could occur, such as acquiring convertible bonds before maturity and reselling them to major shareholders before converting them into stocks.

Accordingly, the amendment requires companies to disclose through major event reports when they designate a call option exerciser or transfer the call option to a third party. Although companies currently disclose the call option exerciser when issuing convertible bonds, most only disclose "the company or a person designated by the company," making it difficult for investors to identify the call option exerciser.

Regarding concerns about misuse in unfair trading, the amendment requires companies to disclose acquisition and handling plans (such as cancellation or resale) through major event reports when acquiring convertible bonds before maturity. Additionally, the amendment allows exceptions to the minimum refixing limit (adjustment below 70% of the initial conversion price) only through a special resolution at the shareholders' meeting.

The current regulations allow exceptions only for unavoidable reasons to restore business normalcy, but some companies have applied exceptions using their articles of incorporation without unavoidable reasons.

In cases where the value of conversion rights is diluted due to capital increases or stock dividends, the amendment allows downward adjustments of the conversion price only to an amount reflecting the dilution effect or higher. The amendment also includes provisions to clearly regulate the reference date for calculating the conversion price of private placement convertible bonds and other related matters.