A 2023 wish list for Korea

A new president has promised to fix systemic issues in Korea’s capital markets, and there are plenty to choose from writes ACGA Research Manager Stephanie Lin.

The past year saw new promises being made in Korea as a presidential election brought prolific campaign pledges to fix entrenched issues in the capital markets. The eventual victor, Yoon Suk-yeol, committed to a compromise on mandatory takeover rules. There was talk from regulators on strengthening protection for minority shareholders in the case of split-offs. Hopes were also raised that English-language disclosure would be improved for the benefit of foreign investors. While these pledges offered a glimpse of hope that the CG system would improve in Korea, more concrete rule changes are required to meet the expectations of investors. With input from ACGA’s Korea Working Group, we have made a ‘wish list’ of burning issues to be addressed:

Cross shareholdings with a treasury twist

The use of treasury shares in cross-shareholding deals continues to eclipse the regulatory agenda, and companies are making the most of it. Barely eight months after a cross-shareholding swap saw telco firm KT Corporation in January 2022 acquire 2.08% of Shinhan Financial Group (the latter in return acquiring 5.46% of KT Corp), the company lined up a treasury stock exchange with Hyundai Motor Group. The deal saw KT swap treasury shares equivalent to a 7.7% stake in the company for 1.04% of Hyundai Motor and 1.46% in auto parts affiliate Hyundai Mobis. The concern is that companies sitting on a pile of treasury stock, including behemoth LG Chemical (LG Chem), will get a taste of such practices. Indeed, in November 2022 smelting giant Korea Zinc announced that it had signed a deal to swap treasury shares with LG Chem where the latter would take a 0.47% stake in return for 1.97% of LG Chem.

While regulators have taken steps to tackle cross-shareholdings in Korea over the past two decades, the issue prevails. On treasury stock in particular, when unveiling its work plan for 2023, the Financial Services Commission (FSC) on 30 January 2023 said only that it would improve disclosure requirements on the “purpose of treasury stock acquisitions and disposition.’’ What would be helpful is to put a cancellation date on companies’ unused treasury shares instead of allowing these stocks to sit on their books indefinitely.

A mandatory takeover rule with caveats

Korea still lacks a mandatory bid rule to protect minority shareholders in the event of M&A activity. Some progress was made in 2022 after discussion by the Financial Services Commission (FSC), with the regulator in December proposing to revise the Financial Investment Services and Capital Market Act (FSCMA) to require takeover bidders acquiring more than 25 percent of a company to offer to make a bid to purchase at least 50 percent (plus one share) of the stock. If shareholders vote for the bidder to buy in excess of 50%, the volume to be bought will be proportionately allocated. The rule is less strict than in other markets, where bidders are required to offer to buy all the shares. The fear is that bidders in Korea may take advantage of this cap. The soonest the rule would come into play is 2024 thanks to a 12-month grace period.

The great Korean split off

Investors in LG Chemical who had bought into the company in the belief that its battery unit was the next big thing were justifiably disappointed when it decided in October 2020 to split off the very same unit and IPO it separately. Fast forward to 2022 and the regulatory response is to nibble at the edges: in March, the FSC introduced revisions to guidelines on disclosure in corporate restructurings, followed in December by disclosure and appraisal rules mandated by the FSC and Financial Supervisory Service (FSS) to benefit dissenting shareholders in the case of a split-off entity embarking on an IPO. But the current draft of the proposal does not include preemptive rights which would require the parent company to first assign shares to existing shareholders in proportion to their holdings when the spun-off entity is set up.

Lost in translation

Piecemeal English-language disclosure by companies in Korea continues to reinforce the view that it is not a market that treats all shareholders fairly. The value of foreign-held shares is significant on the Kospi, yet non-natives to this day still face patchy access to corporate filings in the English language. The FSC in December 2022 announced that mandatory disclosure of information in English will start in 2024 for listed Korean companies with assets of KRW 10 trillion (approximately US$7.92 billion) or those with assets in excess of KRW 2 trillion (about US$1.58 billion) where 30% of their shares are foreign-owned. Companies with assets of KRW 2 trillion or more will not be obligated to do so until 2026. If a company’s foreign ownership is less than 5%, it is not required to file an English disclosure.

The type of information that is required for disclosure also comes in different stages and for some companies (assets above KRW 2 trillion), they will not be required to disclose information required in the first stage (including material management matters, closing financial statements, common statutory disclosure and matters relating to a suspension of trading) until 2028. While this is a move in the right direction, the requirement represents very slow progress on an issue that investors have been advocating for more than a decade.

Board effectiveness

Single-gender boards in large companies (assets of KRW 2 trillion or more) officially became a thing of the past in corporate Korea in August 2022 as a gender quota law passed in 2020 finally became effective. It is a good start but a board with one woman is not sufficient enough to bring about the impact that a properly diverse board would do. In addition to gender, diversity in skills and experience is also essential.

While the number of independent directors has overall increased in Korea, there is still a tendency for appointees to come from an academic background and lack business experience. Moreover, the newly- revised Enforcement Decree of the Commercial Act caps the maximum term of office of an independent director to a total of six years, a limit that may be too short for independent directors without a solid business background to get a full grasp of the company and make an adequate contribution.

Sustainability reporting: still waiting

ESG reporting in Korea remains entirely voluntary. In 2021, the FSC unveiled a policy to require ESG reporting by listed companies in phases. However, this requirement will not take effect until at least 2025, initially only applying to companies with assets of KRW 2 trillion or more. It will take until 2030 for the rule to be applied to all listed companies on the Kospi. At the time of writing CG Watch 2020, the expectation was that Korea would come out with its own ESG guidelines soon: that has yet to happen.

Dual class shares: don’t go there

Last but not least, a draft law which would approve a dual-class system for venture capital firms is in its final legislative stages. The current bill would allow unlisted venture capital firms to issue dual-class shares for up to 10 years but require a conversion to common shares after a three-year grace period (if the founders’ shareholding is below 30%). While we recognize that Korea’s proposed dual-class share system is only applicable to a particular segment of unlisted companies at the moment, the worry is that the framework could be extended to existing issuers and the chaebol over time, which would be a significant step backward for corporate governance in Korea.