On February 18, 2014, the Korean government’s Cabinet Council passed an amendment to the Enforcement Decree of the Commercial Code (the “Amendment”), which provides that in cases where complex derivative securities, derivative products and transactions linked to them are intended to avoid risk, unrealized profits and unrealized losses may be set off against each other. The Amendment became effective simultaneously with its announcement on February 24, 2014.
Under the Enforcement Decree of the Commercial Code prior to the Amendment, unrealized profits were to be uniformly excluded from the funds that may be used for dividends to be paid to shareholders. As a result, the problem occurred where the profits that may be declared as dividends were excessively reduced in the case of financial institutions and export-oriented companies, which generate large amounts of unrealized profits due to actively engaging in transactions to avoid risk.
To address such problem, Article 19(2) of the Enforcement Decree of the Commercial Code was newly established, with the aim of preventing the unreasonable reduction of funds that may be used for dividends by reasonably improving and supplementing the calculation method of the profits that may be declared as dividends. According to the new provision above, in cases where transactions linked to complex derivative securities or derivative products transactions are performed to avoid the risk of the latter type of transactions, the unrealized profits and the corresponding unrealized losses may be set off against each other. However, the set off of unrealized profits and unrealized losses from different and unrelated transactions is not permitted.
According to the Ministry of Justice, the Amendment is expected to increase the amount of profits that may be declared as dividends by the top 10 securities companies in Korea by KRW6 trillion, and those of banks relating to derivative products by KRW26 trillion, based on data from 2012.
Since the above provision of the Amendment is applicable to the shareholders’ resolutions or board resolutions declaring dividends after the Amendment has become effective, financial institutions and export-oriented companies should be aware of the above provision of the Amendment when deciding on the declaration of dividends starting from February 24, 2014.