Starting Next Month, Majority Shareholders Cannot Increase Stakes Through CB Call Options

[Asia Economy Reporter Ji Yeon-jin] From the 1st of next month, listed companies will no longer be able to increase the shares held by major shareholders through convertible bond (CB) call options. A call option is a contract that grants the right to buy specific stocks at a predetermined price on the maturity date. When issuing CBs, listed companies must limit the call option granted to major shareholders to 'within the shareholding ratio at the time of issuance' and are required to disclose the call option exercisers and the number of convertible shares, among other details.

The Financial Supervisory Service (FSS) announced on the 21st the precautions for listed companies issuing CBs following the enforcement of the amendment to the "Regulations on the Issuance and Disclosure of Securities" aimed at enhancing the soundness of the CB market, effective from the 1st of next month.

First, listed companies must ensure that the shareholding ratio of major shareholders and related parties does not increase compared to the time of issuance through the exercise of CB call options. CBs must be issued under conditions that prevent major shareholders from acquiring shares exceeding their shareholding ratio at issuance through exercising CB call options or repurchasing their own CBs, and the scope and shareholding ratio of major shareholders at issuance must be verified for this purpose.

When a third party decides to exercise a CB call option or sell their own CBs, the listed company must submit a major event report (newly established) by the next day and attach documents proving the third party’s CB call option exercise or own CB sale, such as contracts. In particular, if major shareholders are included among the CB call option exercisers or own CB buyers, documents verifying compliance with the limits must also be submitted.

When privately issuing CBs whose conversion price is adjusted downward if the stock price of the listed company falls, the conversion price must be adjusted upward again if the market price rises after the downward adjustment. However, public offerings such as rights offerings or general public offerings are exempt from the obligation to adjust upward.

Third-party allotments require upward adjustments regardless of whether a securities registration statement is submitted. The dates of downward and upward adjustments of the conversion price must be the same.

The amendment applies from the 1st of next month to convertible bonds first resolved for issuance at the board of directors meeting of listed companies. If a listed company fails to submit a major event report or makes false or omitted disclosures of important matters, fines may be imposed.

Moreover, if major shareholders exercise CB call options beyond the regulatory limits or violate the obligation to re-fix upward adjustments, corrective orders, restrictions on securities issuance, or recommendations for dismissal of executives may be imposed.

The FSS stated, "This system improvement is expected to reduce the abuse of convertible bonds for unfair shareholding expansion or unfair trading by major shareholders of listed companies and to better protect the rights and interests of existing shareholders and investors. Additionally, with the new disclosure of previously unknown CB call option exercises and own CB sales, the information available for investment decisions will also expand."

This content was produced with the assistance of AI translation services.