Authorities move to curb dual listings in fight against 'Korea discount'

Korea’s financial authorities on Monday introduced guidelines that restrict dual listings on stock markets as part of efforts to tackle the country’s chronic depreciation of share values, also known as the Korea discount.

Under the new framework, a listed parent company that seeks to spin off and separately list a subsidiary must first demonstrate that it has protected shareholders, then undergo an additional review by the Korea Exchange (KRX).

The Financial Services Commission (FSC) and the KRX jointly released the guidelines on the prohibition of dual listings and exceptions, an initiative intended to prevent large companies — typically family-owned conglomerates — from spinning off successful subsidiaries in a maneuver to maintain ownership control at the expense of the parent firm's share prices.

Any parent company now aiming for dual listing has five new responsibilities: assessing its impact on existing shareholders, preparing measures to protect shareholders’ interests, communicating with shareholders or obtaining their approval, waiting for a vote on the subsidiary’s listing and notification of the outcome and publicly disclosing how those obligations were met.

To ensure the process remains independent, companies must also establish a special committee to review and approve the proposal before it reaches their board.

The same process applies to subsidiaries seeking a listing on an overseas exchange.

Companies that fail to meet these obligations could face penalties of up to 1 billion won ($652,300) and a one-day trading suspension.

"Even overseas listings require companies to submit a securities registration statement to the Financial Supervisory Service for review," Ko Yeong-ho, the head of FSC’s capital markets division, said. "At that stage, regulators will also examine whether the board properly fulfilled its obligations."

Board approval alone is not enough. Once the parent company’s directors approve the listing of a subsidiary, the proposal undergoes a separate review by the KRX.

The exchange will assess whether the subsidiary can operate independently of its parent in terms of both management and business operations and whether the parent’s investors are adequately protected. Financial authorities have identified shareholder approval as the clearest benchmark in making that assessment.

The much-anticipated shareholder approval requirement will follow the Commercial Act’s “3 percent rule" for appointing audit committee members.

Under the rule, the voting rights of the largest shareholder and related parties are capped at 3 percent. The proposal must then win both a majority of votes cast at a shareholder meeting and the support of at least one-quarter of all eligible votes.

Authorities had considered adopting a "majority of minority" voting system, which would have excluded controlling shareholders from the vote and required approval only from minority shareholders. However, the idea was dismissed after financial authorities deemed that the approach could conflict with the Commercial Act’s principle of equal treatment among shareholders.

Shareholder approval will be mandatory before listing subsidiaries that were created through a physical separation, which regulators view as posing the greatest risk of eroding the parent company’s valuation.

For subsidiaries, shareholder approval will require a good-faith effort by the company to protect investors.

Without it, the KRX will subject the listing to a stricter case-by-case review of whether investor protection measures are adequate.

A limited exception will apply to smaller subsidiaries whose sales, operating profit and assets each account for less than 10 percent of the parent company’s corresponding figures. Those companies may proceed without shareholder approval if the board has fully complied with its five shareholder-protection obligations.

The guidelines also allow regulators to consider business necessity when evaluating whether a dual listing is justified. Subsidiaries with substantial funding needs or those operating in advanced technology sectors where timely research and development investment is critical may receive a more relaxed review.

BY PARK HYUN-JU [[email protected]]