On May 28, 2013, an amendment (the “Amendment”) to the Capital Markets and Financial Investment Business Act (the “CMFIBA”) was announced, the key provisions of which are aimed at enhancing direct financing by listed companies.
The Amendment includes a new Article 165-10(2) of the CMFIBA (the “New Provision”), which provides that “when a listed company issues bonds with warrants (“BWs”), it may not issue BWs which allow only the warrants to be transferred.” BWs are bonds which grant their holder the right to subscribe for new shares issued by the company that issued the bonds, and BWs may be categorized as bonds with detachable warrants (“Detachable BWs”) or bonds with non-detachable warrants (“Non-detachable BWs”), depending on whether it is possible to detach the warrants from the bonds and transfer the warrants to a third party separately. Until recently, there were criticisms that Detachable BWs were being misused by major shareholders of some listed companies as a means to increase their shareholdings in such companies, by having them issue Detachable BWs to third parties and then purchasing only the warrants from such third parties at very low prices.
The intent of the New Provision seems to be preventing the formation of such abnormal corporate control structure and enhancing direct financing by listed companies, which is the original purpose of the issuance of BWs. However, most BWs currently issued in Korea are Detachable BWs, and Detachable BWs are generally preferred since they allow companies to procure funds at low interest rates, while investors can readily realize the opportunity for stock price increases separately from the principal and interest on the bonds. According to Article 6 of the Supplementary Provisions of the Amendment, the New Provision is applicable beginning from the first board resolution by a listed company for the issuance of Detachable BWs after the Amendment becomes effective on August 29, 2013. As a result, the issuance of Detachable BWs seems to have sharply increased from when the Amendment was first announced.
Once the issuance of Detachable BWs is prohibited (after the Amendment becomes effective), it is anticipated that the issuance of BWs by listed companies, which as a matter of practice have not been utilizing Non-Detachable BWs, will nearly come to a halt, and marginal companies in poor financial condition may experience difficulty securing liquidity, as one of the most common methods of procuring funds will be prohibited.
Therefore, it is necessary for companies that need funding to soon find appropriate ways to obtain funding that meet their specific criteria and circumstances, by examining the specific advantages and disadvantages of funding methods other than the issuance of Detachable BWs (for example, funding through the issuance of Non-Detachable BWs, convertible bonds, conditional stock warrants, redeemable convertible preferred shares and other types of shares under the Korean Commercial Code).
Further, regarding the recent phenomenon where listed companies are frequently issuing Detachable BWs before the Amendment becomes effective, it may be necessary to examine whether the legal rights of the minority shareholders of such listed companies were infringed as a result of such issuance of Detachable BWs.