If shareholders do not approve, ‘listing of a subsidiary created through a physical spin-off’ will not be allowed… Duplicate-listing guidelines unveiled to block ‘a second LG Energy Solution’ - 경향신문

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In April, Financial Services Commission Chairman Lee Eok-won delivers congratulatory remarks at a public seminar held at the Korea Exchange in Yeouido, Seoul, to gather opinions on improving the duplicate-listing system. Yonhap News

As early as the end of this month, when a company seeks to carve out a business into a separate subsidiary and list it, approval from shareholders of the parent company will be mandatory. In the approval process, the controlling shareholder voting right is recognized only up to 3%. To prevent repeated harm to ordinary shareholders amid controversy over ‘split listings’, the financial authorities have effectively raised the threshold for duplicate listings.

The Financial Services Commission and the Korea Exchange on the 6th announced ‘duplicate-listing guidelines’ that require strict standards for listing subsidiaries. Under these guidelines, when the parent company is already listed, listing a subsidiary will be permitted only after passing strict criteria, and in principle it is prohibited if those criteria are not satisfied.

The key criterion is whether shareholders of the parent company approve. In particular, when splitting the company to create a subsidiary and list it (physical spin-off), approval by parent shareholders is essential. If shareholders do not approve, the listing itself is impossible. This measure targets the problem seen in the 2022 case in which LG Chem physically spun off its battery division and listed LG Energy Solution, where even though a core business was carved out, shareholders could do nothing but watch.

For ordinary subsidiary listings such as acquiring another company or newly establishing a business and listing it, shareholder approval is only ‘recommended’. Subsidiaries whose sales, operating profit, and assets are each less than 10% of the parent company are exempt from the shareholder-approval procedure.

The method for shareholder approval adopts the ‘3% rule’. Even if a stake exceeding 3% is held, voting rights are recognized only up to 3%, and passage requires support from more than half of attending shareholders and at least one quarter of all shares outstanding. The intent is to reduce the influence of controlling shareholders.

The responsibility of the parent company board of directors was also strengthened. Until now, domestic companies had argued that “the parent board cannot interfere in matters decided by an independent legal entity,” and they faced criticism for being passive toward the interests of their own shareholders.

The guidelines also set out the ‘five fiduciary duties to shareholders’ that the parent company board must observe: ① an assessment of how the subsidiary listing would affect parent shareholders ② preparation of measures to protect shareholders ③ communication with and consent from shareholders ④ a resolution for or against ⑤ disclosure of those details. If these procedures are not properly followed, it becomes harder for the subsidiary to pass listing review. If the board breaches its duties, a penalty of up to 1 billion won and a one day trading halt may be imposed, and if disclosure obligations are violated, demerit points can accumulate and the company may become subject to a substantive delisting review.

The exchange will also examine how independent the subsidiary is from the parent. It will look at the extent to which the main products, services, and customers of the subsidiary overlap with those of the parent, and whether the subsidiary has the capacity to conduct research and development and expand sales on its own. The aim is to prevent listing companies that do essentially the same work as the parent or depend on it excessively.

However, there is also criticism that the ‘3% rule’ adopted in these guidelines is insufficient from the perspective of protecting the rights of ordinary shareholders. During discussions on the guidelines, the ‘majority of minority (MoM)’ method, which would exclude the controlling shareholder and require a majority approval among the remaining shareholders, was strongly considered but not adopted.

Lee Nam-woo, chair of the Korea Corporate Governance Forum, called the guidelines “very disappointing” and said, “The 3% rule is complex and there are many workarounds such as wash trades by controlling shareholders, so the majority-of-minority method is essential to ensure substantive equality for ordinary shareholders.”

By contrast, there are also concerns that uniform regulation could dampen the capital market. Ryu Young-jae, CEO of Sustinvest, said, “‘Duplicate listing is wrong’ as a frame is being reinforced, and even when there are no major procedural problems, decisions may tilt toward disallowance or companies may voluntarily withdraw listings, which is undesirable,” adding, “Subsidiaries that were revived through investments made long ago should be monetized through initial public offerings (IPOs) and reinvested so that capital circulates.”

These guidelines will go through a notice period until the 14th and, following resolutions by the Securities and Futures Commission and the Financial Services Commission, are scheduled to take effect as early as the end of this month.