Korea legislation guide
By Jong Koo Park and Yun Goo Kwon
Kim & Chang
Tel: +82 2 3703 1114 Fax: +82 2 737 9091-3 Website: www.kimchang.com
On April 14 2011, the Korean government promulgated new amendments to the Korean Commercial Code (the KCC). The amendments include an array of provisions that aim for more flexibility in relation to corporate financing, and enhanced transparency in relation to corporate governance.
The amendments will become effective from April 15 2012. The following are brief descriptions of the key changes set forth in the amendments.
More flexibility for financial structures
New forms of business entities: the amendments introduce limited partnerships modelled after US-style limited partnerships, which consist of general partner(s) and limited partner(s). The amendments also provide for limited liability companies modelled after US-style limited liability companies, which recognise the limited liability of members while granting them autonomy to establish, manage, and structure the organisation of the company.
Diverse stock types: following the amendments, companies will be able to issue more diverse classes of shares, such as common shares with no voting rights or with restricted voting rights, as well as shares that have different rights in relation to the distribution of profits, liquidation, stock conversion or redemption. In addition, the amendments will allow companies to issue no-par value stock.
Squeeze outs: the amendments also permit squeeze outs of minority shareholders. For example, compulsory acquisitions by a controlling shareholder (with a stake of 95% or more) of shares held by minority shareholders at fair value. In exchange, minority shareholders will be granted appraisal rights that they can exercise by demanding fair compensation from the controlling shareholder as consideration for their shares.
More flexible dividend policies: pursuant to the amendments, dividend payments can be approved by the directors under certain circumstances (instead of having to undergo approval at a general meeting of shareholders each time). The amendments also allow the payment of non-cash dividends in addition to cash dividends.
Use of legal reserves: the disposition of legal reserves is strictly restricted under the KCC. Following the amendments, however, the shareholders of a company can resolve to use the legal reserves exceeding 150% of the company’s paid-in capital to pay dividends or for certain other purposes without causing the company to undergo a capital reduction.
Acquisition of treasury shares: the KCC has had strict limitations on the acquisition of treasury shares in the case of private companies, but the amendments will allow private companies to acquire treasury shares in an amount up to their distributable profits. In addition, private companies may hold such treasury shares without being subject to disposition requirements.
Elimination of prohibition against offsetting payments of share capital: the provisions in the KCC that prohibit the offsetting of share capital payments will be eliminated, making it possible for non-distressed companies to effect debt/equity swaps as well.
Relaxed rules governing merger consideration: under the amendments, the surviving company in a merger may pay the shareholders of the company being merged into just cash or bonds, without the need to deliver to such shareholders any new shares or treasury shares of the surviving company.
Relaxed restrictions on issuance ceilings and types of bonds: ceilings on the total issuance amount of bonds will be abandoned. Further, the amendments will provide a legal basis for issuing participating bonds and a variety of other bonds.
Enhanced transparency in corporate governance
Prohibition of the usurpation of business opportunities: a new provision will be added to the KCC that prohibits directors of companies from usurping or causing their relatives or other third parties to usurp business opportunities that are beneficial to the relevant company.
Expanded restrictions on self-dealing transactions: only directors are subject to restrictions on self-dealing transactions. Following the amendments, however, such restrictions shall apply to directors and major shareholders, relatives of such directors and major shareholders, as well as certain affiliated companies.
‘Executive officer’ system: the amendments allow companies to choose to appoint an executive officer who will be dedicated to overseeing the executive functions of the company, under the supervision of the board of directors. However, companies may choose to maintain their current director systems instead of adopting the new executive officer system.
‘Compliance officer’ system: all listed companies of a certain size (the threshold for which will be determined before the amendments to the KCC become effective) will be required to implement compliance control regulations and to appoint a compliance officer responsible for monitoring adherence to such regulations.