Dual listings banned without shareholder protections; 3% rule to apply in spinoff cases

Dual listings will in effect be prohibited unless parent companies put shareholder protection measures in place. Financial regulators have established five mandatory duties for parent company boards — including shareholder impact assessments and approval votes — as conditions for obtaining an exemption, and have drawn up special review criteria. The shareholder approval standard, one of the most closely watched elements, will apply the so-called "3% rule," which caps voting rights for the largest shareholders and related parties at 3%.

The Financial Services Commission and Korea Exchange on Monday released the detailed exchange rules and guidelines governing the principle-based ban on dual listings and the conditions under which exceptions will be permitted.

The FSC said it had redesigned the board obligations and listing review criteria "to prohibit asymmetric dual listings that disregard the rights and interests of ordinary shareholders of the parent company."

Until now, dual listings had proceeded without any separate obligations on parent company boards or controlling shareholders, even when such listings raised concerns about harm to ordinary shareholders. Listing reviews, moreover, applied general standards except in cases involving spinoff listings.

In response, the FSC and Korea Exchange decided to impose five duties on parent company boards seeking a dual listing, grounded in the shareholder loyalty obligations under the Commercial Act.

First, boards must assess the impact of the dual listing on shareholders and prepare shareholder protection measures. Examples spelled out in the guidelines include cash dividends or share buybacks and cancellations funded by proceeds from secondary share sales, distribution of subsidiary shares through in-kind dividends, investments in new businesses to enhance the parent company's value, and pledges to refrain from spinning off other businesses or listing other subsidiaries for a set period.

Boards must also communicate with shareholders based on the impact assessment and protection plan, and where necessary explicitly confirm shareholder consent through a general meeting or other means.

Boards must then hold a formal vote on the matter and notify the subsidiary of the outcome, disclosing their compliance at each stage of the process. To ensure impartial fulfillment of these duties, an independent special committee is to be established to conduct prior deliberation and approval at each step.

To strengthen the committee's independence, the rules require that its chair be an independent director, or that at least two-thirds of its members be independent directors or outside experts who meet the qualifications for independent directors.

All five duties apply equally when a subsidiary is listed overseas.

Boards that violate these obligations face a penalty of up to 1 billion won ($649,000) and a one-day trading suspension.

On the practical enforceability of the rules for overseas listings, Ko Yeong-ho, head of the FSC's capital markets division, said Korea Exchange would assess whether a parent company's board had properly fulfilled its duties and would impose penalties for violations. "At the same time, since a securities registration statement must be filed with the Financial Supervisory Service even for an overseas listing, whether the board obligations have been properly reflected will also be considered at that stage," Ko said.

Regulators also tightened their review standards. Under the new special review criteria for dual listings, a subsidiary must be recognized as operationally and managerially independent from its parent.

A subsidiary will have difficulty meeting the independence requirement if its core business relies excessively on the parent, or if the parent effectively makes key management decisions for the subsidiary.

New investor protection requirements have also been introduced in concrete terms. The five board duties must have been faithfully carried out, and the board must ultimately have passed a resolution in favor of the listing.

Regulators will scrutinize in particular whether shareholder protection efforts were genuinely fulfilled, and said shareholder approval is the most direct way to assess the adequacy of those efforts.

The standard for recognizing shareholder approval mirrors the "3% rule" applied to the election of audit committee members under the Commercial Act. The combined voting rights of the largest shareholder and related parties are capped at 3%, and approval requires a majority of shares present at the meeting as well as consent from at least one-quarter of all voting rights.

Regulators said they generally recommend obtaining shareholder approval as a matter of principle, but will require it as mandatory when a dual listing involves a subsidiary created through a physical spinoff — the scenario where the risk of a parent company discount is greatest and the need to protect ordinary shareholders most acute.

In other general cases, obtaining shareholder approval will be treated as presumptive evidence that shareholder protection obligations have been met, while cases without shareholder approval will be subject to strict individual review.

However, if a subsidiary accounts for less than 10 percent of the parent's sales, operating profit and assets across all three measures, it will be classified as a "low-weight company" whose impact on parent shareholders is considered limited. In such cases, the investor protection requirement will be deemed satisfied if the board has faithfully fulfilled the five duties and passed a resolution in favor of the listing, even without shareholder approval.

For other general dual listings, the FSC said a subsidiary's case would receive greater recognition during review if there is a strong need to raise funds for the subsidiary's business, or if the subsidiary operates in an advanced industry requiring timely research investment and independent financing.

The exchange rule amendments and dual-listing guidelines announced Monday will undergo a public comment period through July 14 before taking final effect following approval at regular meetings of the Securities and Futures Commission and the FSC.

Meanwhile, according to the FSC, South Korea's dual-listing ratio — measured as the proportion of market capitalization held in cross-shareholdings among listed companies relative to total market cap — stood at 11.2 percent at the end of last year, far above the United States (0.05 percent), Japan (4.0 percent), China (2.4 percent) and Taiwan (2.7 percent).