Shareholder Approval Under '3% Rule' Mandatory for Dual Listing of Spun-off Subsidiaries

Parent companies seeking to pursue a dual listing for a subsidiary created through a physical spin-off will now be required to obtain shareholder approval through the so-called 3% rule.

The board of directors of a parent company pursuing a dual listing will be tasked with five core duties based on the fiduciary duty to shareholders, including assessing the impact on shareholders, establishing protection measures, and engaging in shareholder communication.

The Financial Services Commission (FSC) and the Korea Exchange (KRX) unveiled these details on July 6 in their new exchange regulations and guidelines, which aim to restrict dual listings in principle while allowing for exceptions.

The FSC stated, "We have redesigned the duties of the parent company's board and the listing review criteria to prohibit asymmetric dual listings that do not consider the interests of the parent company's general shareholders."

Previously, despite concerns that dual listings could infringe upon the rights of general shareholders, the boards and controlling shareholders of parent companies faced no specific obligations. Furthermore, with the exception of spin-off listings, standard listing review criteria were applied.

In response, the FSC and the KRX have decided to impose five duties on the boards of parent companies seeking dual listings, based on the fiduciary duty to shareholders under commercial law.

First, the board must assess the impact of the dual listing on shareholders and establish measures to protect them.

Examples of shareholder protection measures specified in the guidelines include cash dividends or treasury stock cancellations using proceeds from the sale of old shares, distribution of subsidiary shares such as through dividends in kind, enhancing parent company value through new business investments, and commitments to refrain from splitting other businesses or listing other subsidiaries for a certain period.

Additionally, the board must communicate with shareholders based on the impact assessment and protection measures, and if necessary, explicitly confirm shareholder consent through a general meeting of shareholders.

Following this, the board must hold a vote on the proposal and notify the subsidiary of the results, with all steps of the duty fulfillment to be disclosed publicly.

In particular, to ensure the board of directors fulfills its duties fairly, an independent special committee must be established to oversee the pre-deliberation and resolution process.

These five duties apply equally even when a subsidiary is listed overseas.

Violations of these board duties will result in penalties, including a fine of up to 1 billion won and a one-day suspension of trading.

Regarding the effectiveness of applying these rules to overseas listings, Ko Young-ho, head of the Capital Markets Division at the FSC, stated, "The Korea Exchange will monitor whether the parent company's board has properly fulfilled its duties and will impose penalties in case of violations. Furthermore, since a securities registration statement must be submitted to the Financial Supervisory Service even for overseas listings, this stage will also ensure that the fulfillment of board duties is properly reflected."

The authorities have also tightened review criteria.

Under the new special review criteria for dual listings, it must be recognized that the subsidiary maintains independence in its operations and management from the parent company.

It will be difficult to meet the independence requirement if the subsidiary's primary business is excessively dependent on the parent company, or if the parent company effectively makes key management decisions for the subsidiary.

New, specific requirements for investor protection have also been established.

A key requirement is that the parent company's board must have fully fulfilled its five duties and ultimately passed a resolution in favor of the listing.

The authorities will specifically review whether efforts to protect shareholders were properly implemented, noting that the most direct way to judge the sufficiency of such efforts is through shareholder consent.

The standard for recognizing shareholder consent is the 3% rule, which is equivalent to the rule used for electing members of an audit committee under commercial law.

Under this rule, the voting rights of the largest shareholder and their specially related persons are capped at 3%, and the proposal must receive approval from a majority of the shareholders present, as well as at least one-fourth of the total voting rights.

While the authorities have recommended obtaining shareholder consent as a general principle, they have decided to make it mandatory when pursuing a dual listing for a physically spun-off subsidiary.

This is because such cases carry high risks of a "parent company discount," making the protection of general shareholders most critical.

In other general cases, if shareholder consent is obtained, it will be presumed that shareholder protection efforts have been fulfilled. If consent is not obtained, the authorities will strictly review the implementation of protection efforts on a case-by-case basis.

However, if a subsidiary accounts for less than 10% of the parent company's revenue, operating profit, and assets, it will be classified as a "low-weight company," as the impact on the parent company's shareholders is considered minimal.

In such cases, even without shareholder consent, the investor protection requirements will be considered met if the board has fulfilled its five duties and passed a resolution in favor of the listing.

The FSC also explained that in other general dual listing cases, the legitimacy of the listing may be more easily recognized if the subsidiary has a significant need for capital, or if it is in a high-tech industry that requires timely research investment and independent financing.

The proposed amendments to the exchange regulations and the new dual listing guidelines announced today will undergo a notice period until the 14th, followed by final implementation after resolutions by the Securities and Futures Commission and the FSC's regular meetings.

Meanwhile, according to the FSC, the dual listing ratio—calculated as the ratio of market capitalization held by listed companies to total market capitalization—stood at 11.2% in South Korea as of the end of last year, which is higher than in other major countries such as the United States (0.05%), Japan (4.0%), China (2.4%), and Taiwan (2.7%).

(Photo: Yonhap News)
※ Please note: This article was translated by AI and may contain errors.