by Keun Byung LEE Esq.

Bae, Kim & Lee    

October 1, 1996 marks the day that key amendments to the Korea Commercial Code, which were passed at the end of last year by the Korean National Assembly, will come into effect. The Code, which serve as the principal vehicle regulating the affairs of business under Korean law, has been in existence since 1962, and was, prior to this amendment, last revised in 1991. This latest amendment brings numerous changes to the previous Code and attempts to respond to both rapid changes of recent times in the international and domestic commercial environment and the increase of global competition, having the principal aim of assisting companies, whether domestic or foreign invested, to adapt to the competitive business environment by eliminating a number of cumbersome procedures contained in the current version of the Code. Among the various change in the Code, two specific revisions, which have a direct impact on minority shareholders, deserve particular attention.

I. Right of Shareholders when Objecting to Resolutions of the Board of Directors

One of the key dilemmas facing shareholders in an unlisted company (that is, companies which are not listed on the Korea Stock Exchange) is what to do when key business decisions to which they object are passed by resolution of the board of directors of the company. One or more shareholders may, for example, belive that the particular resolution of the board is so potentially harmful to the company, perhaps taking the company in an entirely new direction, that the company itself-and the shareholder's stake in it-may ultimately be jeopardized. Examples of such types of decisions are where the board of directors authorizes (a) the transfer of the whole, or a significant part, of the business of the company to another company; (b) the acquisition, partial or otherwise, of the business of another company; (c) the lease or delegation of the company's business, whether whole or partial, or any similar contracts ; or (d) a merger.

In face of such decisions, which may clearly have a major effect, good or bad, on the company, a shareholder may find itself in the position of wishing to "get out" before its fears are proved correct. The difficulty, however, is that as the law currently stands in Korea, shareholders of unlisted companies have no power to force the company to buy back their shares.

This contrasts with the position of shareholders in companies which are listed on the Korea Stock Exchange, who may force the company to buy back their shares in such situations, a right specifically granted to them by the Korean Securities Exchange Act.

That anomaly, however, will soon change. After October 1, 1996, all companies which are subject to the Code (which basically means joint-stock companies) will be required to buy back shares from a shareholder, if the shareholder so demands. This, however, is only available when certain conditions are met.

As the law currently stands, a company must inform its shareholders, prior to any general meeting of shareholders, of those issues which will be on the agenda and which will be put to a vote. The revised Code now adds a requirement to inform shareholders expressly of the procedure by which they may request the company to buy back their shares in the event they wish to do so.

Similarly, the new Code imposes certain obligations on the shareholders in such situations. Thus, they must inform the company of their intention to dissent at the general meeting and must do so in writing, before the General Meeting takes place. Likewise, if they wish to sell back their shares, they must submit their request to the company in writing, specifying the type and number of shares which they wish to dispose of. This must be done within 20 days from the date of the General Meeting of Share holders.

A key element in all this, of course, is price. The price of the shares in the buyback is to be decided through negotiation between the shareholders and the company. Where a price cannot be agreed upon through negotiation, the revised Code provides that the purchase price is to be determined by an accountant. This contrasts with the Securities Exchange Act which provided that the purchase price is the weighted average of the daily prices of the relevant class of share on the Korea Stock Exchange for the sixty day period during which the shares were traded on the Korean Stock Exchange prior to the date of the resolution of the relevant meeting of the Board of Directors.

II. Share Transfer Restrictions

Another area which has, under the current Code, given rise to difficulty in some cases and been the subject of criticism is that of share transfers. Currently, the Code enshrines the principle of free transferability of shares, and thus even if the articles of incorporation of a company expressly provide for restrictions upon share transfers, these are invalid and unenforceable. This, however, can pose difficulties where a company may have legitimate reasons for restricting the transfer of shares, such as the desire to avoid substantial blocks of shares being transferred to parties who are hostile to the current management, creating the eventual risk of a deadlock in the company's business.

The revised Code provides a remedy, permitting a company, in its articles of incorporation, to require board approval for any share transfer. Where a company chooses to take advantage of this new provision, a shareholder wishing to make a transfer must formally request approval of the transfer from the company, and do so in writing. The request must identify the potential purchaser of the shares and state the type and number of share offered for sale. The effect, therefore, is that the shareholder is required-if the company imposes such a restriction-to seek approval which is not merely general in nature but purchaser-specific.

The company, in turn, must provide its response to the potential selling shareholder within one month from the date of receipt of such request. The right of refusal, however, is not absolute and dose not permit the company to close the door entirely on the shareholder's wish to dispose of shares. The new Code builds in a mechanism designed to avoid deadlock where the company refuses to approve the sale to the specific purchaser in question, by giving the shareholder the right to impose a choice upon the company-either to designate a purchaser more to its liking, or, alternatively, to buy back the shares itself.

The shareholder in this case has 20 days from receiving notice of the rejection of approval for its original sale in which to notify the company that it wishes to exercise the fallback option provided under the new Code. Once this is done, the ball is in the court of the board of directors, which has two weeks from the date of receipt of such request in which to designate a more suitable purchaser and so inform the seller and potential new purchaser. If the board fails to do so within that period, the law steps in, imposing an automatic assumption that the board approved the share transfer.

As mentioned above, the new Code does not oblige a company to place such restrictions on share transfers, and merely grants it the right to do so of if it so chooses. If a company wishes to take advantage of this change in the law, the existence of such a restriction in the articles of incorporation must be made clear in any share subscription agreement and on any share certificate, and registered in the official Korean corporate registry. The same applies to any bond subscription agreement, bond certificate and bondholders'register, where either convertible bonds or bonds with warrants have been issued.

Interestingly, one question which the new Code does not address, at least as of now, is whether the inclusion of any share transfer restriction in a listed company's articles of incorporation applies to events such as the issuance of new shares or bonds convertible into shares which had taken place prior to the change in the articles of incorporation, and specifically, whether shareholders who subscribed for such shares or bonds prior to the adoprion of such restrictions would be bound by them.

The provision allowing share transfer restrictions is particularly interesting in that in one sense it runs counter to certain legal changes which are anticipated in the coming years so far as listed companies are concerned.

Specifically, the revised version of Article 200 of the Securities Exchange Act comes into force in January 1997 with the effect of lifting the current restrictions on mergers and acquisitions which, under the version of Article 200 currently in effect, generally restrict individual shareholdings of listed stocks to an aggregate of ten percent of total issued and outstanding shares.

Against this background, a number of M&A boutiques have reportedly been set up recently, as the market waits for the changes to Article 200 Although the Securities Exchange Act only applies to companies listed on the Korean Stock Exchange, the revision to Article 200 is expected to have an impact on unlisted companies also. Equally, while the revised Commercial Code may, with its provision permitting restrictions on share transfers, serve as a protection to unlisted companies from the threat of mergers and acquisitions, the conventional wisdom is that such restriction is unlikely to apply to listed companies.

Written by Keun Byung LEE Esq.
Partner of Bae, Kim & Lee