If the CB Conversion Price Drops More Than 30%, Shareholders' Meeting Approval Is Required

Financial Services Commission Holds 'CB Market Soundness Enhancement Meeting'
Strengthening Disclosure Obligations for CB Issuance and Distribution
Strict Sanctions on Unfair CB Trading

Financial Services Commission. Photo by Dongju Yoon doso7@

Going forward, disclosure obligations will be strengthened for the issuance and circulation of convertible bonds (CBs), which have a significant impact on corporate governance and equity value. Sanctions for unfair trading using CBs will also be reinforced.

On the 23rd, the Financial Services Commission held a "Convertible Bond Market Soundness Enhancement Meeting" at the Korea Exchange in Seoul to discuss these measures. This meeting was an opportunity to outline future policy directions, reflecting opinions from a related agencies and experts forum held last July.

CBs are bonds that grant the right to convert into shares. In Korea, they have been used as a major financing tool for small and venture companies, combined with call options and refixing conditions. However, some have exploited the unique characteristics of CBs, causing major shareholders to undermine shareholder value.

From now on, disclosure obligations will be imposed when designating call option exercisers in CB issuance and circulation. Under current regulations, the call option exercer is mostly disclosed only as "the company or a person designated by the company" at the time of CB issuance. Going forward, specific exercisers, whether fair consideration was received (in cases where the issuing company transfers the call option to a third party), and payment amounts must be disclosed.

Disclosure regarding the acquisition of "pre-maturity CBs" by the issuing company will also be strengthened. Concerns have been raised that pre-maturity acquired CBs could be resold to major shareholders and then converted into shares, potentially being abused for unfair capital market trading. Therefore, reasons for pre-maturity acquisition and future handling plans (such as cancellation or resale) will be required to be disclosed.

In particular, to protect investors, when issuing private placement CBs, disclosure through a major matters report one week before the payment date after the board resolution will be mandated, similar to private placement capital increases.

Additionally, adjustments to the conversion price due to stock price declines (refixing) will be rationalized. Current regulations limit the refixing floor to 70% of the initial conversion price based on market price fluctuations. However, exceptions below 70% are allowed through a special resolution at the shareholders' meeting or by the articles of incorporation in unavoidable cases such as corporate restructuring for business normalization.

Nevertheless, some companies have continuously evaded the 70% floor regulation by using the articles of incorporation for reasons such as fundraising or asset acquisition. Therefore, exceptions to the CB refixing floor will only be applied if shareholder meeting approval is obtained on a case-by-case basis.

Furthermore, when the value of conversion rights is diluted due to capital increases or stock dividends, the conversion price can only be lowered to an amount reflecting the dilution effect or higher. Also, the reference date for calculating the conversion price of private placement CBs must reflect the market price on the actual payment date.

Finally, unfair trading in the CB market will be intensively inspected. Ongoing investigations will be expedited, and unfair trading allegations involving private placement CBs will continue to be thoroughly investigated.

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