It has become clear that when a listed company conducts a spin-off, it is not allowed to allocate new shares to its own shares. When a listed company merges with another corporation, the dissolved corporation's own shares cannot be allocated new shares either. This is expected to prevent the so-called 'own share magic.'
The Financial Services Commission said on the 24th that a revision of the ‘Capital Markets Act Enforcement Decree’ containing such content was approved at the State Council meeting. The revised enforcement decree is scheduled to take effect from the 31st.
The revised enforcement decree includes provisions limiting the allocation of new shares for own shares during a spin-off. Until now, due to unclear laws and precedents, new shares were allocated to own shares during a spin-off. This has drawn criticism that the 'own share magic' merely increases the controlling power of major shareholders.
For example, if Company A's equity structure consists of 30% own shares, 40% major shareholders, and 30% general shareholders, the voting rights ratio of major shareholders to general shareholders is 4:3 (57%:43%). This is because own shares do not have voting rights.
However, when Company A is spun off to create Company B and shares are given to the own shares, the equity structure of Company B becomes 30% Company A, 40% major shareholders, and 30% general shareholders. This means that the own shares are converted into Company A's equity and gain voting rights. Combining the major shareholders and Company A's equity would increase Company B's controlling power to 70%. If allocation of new shares to own shares is prohibited under the revised enforcement decree, this type of own share magic will also disappear.
The revised enforcement decree also includes measures to strengthen disclosures related to own shares. If a listed company holds own shares accounting for more than 5% of the number of shares outstanding, it must prepare a report detailing the status of shareholding, purpose of holding, plans for additional acquisition or cancellation, and obtain board approval for the disclosure. Additionally, all listed companies must specifically disclose the purpose of disposal, counterparties, selection reasons, and expected stock value dilution effects when disposing of their own shares.
The process of acquiring own shares through a trust has also been added to the disclosure requirements in the revised enforcement decree. If the amount paid for acquiring own shares is less than the initially planned and disclosed amount, a statement of reasons must be submitted. Furthermore, a new trust contract will be prohibited from being signed until one month after the planned own share acquisition period expires, and even when the trustee disposes of own shares during the trust contract period, they must disclose a master report containing the disposal purpose, similar to direct disposals.
The Financial Services Commission said it will collaborate with related agencies, including the Financial Supervisory Service, to ensure this revised enforcement decree is established. A Financial Services Commission official remarked, “We expect the revised enforcement decree to contribute to ensuring that the own shares of listed companies are not misused as a means to enhance the controlling power of major shareholders and are operated according to the original purpose of enhancing shareholder value.”