On January 5 2009, the Financial Services Commission (FSC) released a draft regulation (amended regulation), which will replace the current Regulation on Securities Issuance and Disclosure (current regulation) in its entirety. It is scheduled to become effective on the effective date (February 4 2009) of the Capital Market and Financial Investment Business Act (Capital Market Act), following a 20-day public review period and a review by the Ministry of Legislation. As such, the current draft of the amended regulation is subject to changes.
SRS filing exemption
Under the current regulation, a Korean company seeking to offer bonds overseas is required to file a Securities Registration Statement (SRS) with the FSC unless the offering is structured to ensure that no Korean investors, general and professional institutional investors alike, acquire the bonds for a period of one year from the offering (lock-up period). The amended regulation, however, further exempts a Korean company from SRS filing obligations if the overseas bond offering restricts the acquisition and trading of the bonds by and among certain enumerated professional institutional investors. This amendment will effectively permit domestic professional institutional investors to acquire bonds issued overseas by a Korean company. The new safe-harbour exemption under the amended regulation seems to be in line with US Regulation S and 144A exemptions, but no concrete guidelines have been provided by the FSC. It is therefore important to watch closely how the FSC will interpret and apply this expanded safe-harbour exemption. This exemption applies only to the issuance of straight debt securities and not equity-linked securities such as convertible bonds (CBs), bonds with warrants (BWs) and exchangeable bonds (EBs), among others.
Changed pricing mechanism of base price
The amended regulation changes the date (base date) used to determine the base price (base price) of the underlying shares to three trading days before the offering date. The base price is the weighted arithmetic average of the share price publicly announced on such day, multiplied by a maximum discount rate of 10%. Under the current regulation, the base date is the trading day immediately preceding the board of directors' meeting on which the specific quantity and the price of the underlying shares are determined. The base price is (a) the lesser of the arithmetic average of: (i) the average closing price of the shares one month immediately preceding the base date; (ii) the average closing price of the shares one week immediately preceding the base date; and (iii) the closing price of the shares on the base date, and (b) the price in (iii), multiplied by a maximum discount rate of 10%. This amendment aims at generating a base price that more accurately reflects the market price of the underlying shares by pushing back the base date closer to the offering date. Furthermore, the amended regulation has removed pricing restrictions for the base price when new shares are issued and allocated solely to existing shareholders in proportion to their shareholdings (or in a public offering where existing shareholders are granted a right of first allocation in proportion to their shareholdings).
Pre-marketing before SRS filing
The current Securities and Exchange Act did not provide sufficient guidelines in terms of the scope of permitted pre-marketing activities before the SRS becomes effective. In contrast, the Capital Market Act excludes from the definition of offering mere marketing/publicity activities, which purport to simply inform potential investors of an offering by disclosing the issuer's name, the type and estimated price of the securities to be issued and expected offering schedule, among other things. As a result, it has become clearer that certain investor education-related pre-marketing activities are permitted under the Capital Market Act regime even before filing an SRS. There are, however, certain requirements to observe in order to engage in such pre-marketing activities under the amended regulation. For example: (i) the name of the underwriter, the number of securities to be issued and the issuing price cannot be disclosed; and (ii) there must be express notice that the offering is subject to the terms in the preliminary offering circular and the final offering circular.
SRS filing required
The current law requires that only an M&A report be filed with the FSS in a transaction involving a merger, business consolidation, spin-off, business transfer or asset transfer (M&A) of Korean companies listed on the Korea Exchange.
Under the Capital Market Act and the amended regulation, an SRS is also required whenever new shares are issued in, or in relation to, an M&A involving Korean companies listed on the Korea Exchange. Therefore, the applicable waiting period for an SRS and the possibility of an extension of the waiting period (for example, when the FSS raises an objection or issues a rectification order) must be considered in such M&A transactions. This may effectively diminish certainty in terms of scheduling a timeline in M&A transactions.
Hee Gang Shin