South Korea. Special Report. South Korean companies gather speed in their hunt for outbound opportunities

Transcription

1 INTERACTIVE EDITION Volume 8 Issue MAGAZINE FOR THE IN-HOUSE COMMUNITY IN ASIA & THE MIDDLE EAST l Special Report n companies gather speed in their hunt for outbound opportunities PUBLISHED BY Talking shop with NXP Semiconductors' GC for Asia International debt capital raising: in the stars for China? Keeping a lid on arbitration costs Exploiting your intellectual assets

2 Special report To list or not to list? As the Republic of Korea sets about enticing foreign companies to pursue equity listings on the Korea Exchange, Kim & Chang s Chang Hyeon Ko and Seong-Koo Cheong discuss the relevant procedures, requirements, legal considerations and benefits for foreign entities who are considering venturing into the Land of the Morning Calm. With the stated goal of becoming a worldclass premier exchange, the Korea Exchange (the KRX) revised its listing rules and implemented a system of substantial examination of delisting with the enactment of the Financial Investment Services and Capital Markets Act in 2009, in order to be in line with international standards. More recently, the KRX has held information sessions with local companies in Asia, including companies from China, Japan and Indonesia, to encourage their listing on the KRX, and so far the efforts appear to be paying off. As of October 2010, sixteen foreign entities are listed on the KRX (as seen in Table 1), and there are dozens of other foreign entities that are currently preparing for listing. The KRX may be an attractive option for several reasons. The Exchange offers a solid investor base with an increase in fund participation by individual investors and an increase in the stock portion of the portfolios of institutional investors. Moreover, combined with strong demand for foreign equities by investors as well as competitive listing fees, in comparison to other stock exchanges the KRX is also well-equipped with IT infrastructure such as online and mobile trading platforms. KRX listing procedures In general, the listing procedures for the KRX are as follows: (1) preparation for listing; (2) preliminary review of listing eligibility; (3) public offering; and (4) listing (see Flow Chart of KRX Listing Procedures on p.36). In preparing for the initial listing stage, the foreign entity would discuss the listing with the KRX, appoint a lead manager among Korean securities companies, conduct due diligence, and amend the articles of incorporation and other organisational documents as required. The process concerning the preliminary review of listing eligibility usually takes one or two months, and consists of the review and approval of the preliminary listing application by the KRX. Once the KRX approves the application, public offering of the shares begins, at which time the foreign entity files a Securities Registration Statement (SRS) with the Financial Supervisory Service (FSS) and begins solicitation of investors. Upon completion of the public offering, the foreign entity needs to submit the listing application and other documents to the KRX. Listing of the shares on the exchange is generally completed within two or three business days if the KRX approves the application and notifies the foreign entity of such listing. KRX listing requirements In order to be eligible for listing, the foreign entity must satisfy both the quantitative and qualitative requirements of the KRX. The quantitative requirements relate to the size of a company s capital, its business performance and share 34 ASIAN-COUNSEL

3 To list or not to list? Chang Hyeon Ko and Seong-Koo Cheong, Kim & Chang distribution, and are designed to review the listing eligibility of the foreign entity in the early stages of the listing. The KRX operates the KOSPI market for mid-to-large companies with strong financial records, and the market for smaller entities such as start-up companies. The qualitative requirements have regard to going concerns, transparency of management, investor protection, and sound market development of the foreign entity that has satisfied the quantitative requirements and are designed to review the suitability of the listing on the KRX. Legal issues related to the listing of foreign companies The form of the KRX listing of foreign companies Similar to the other stock exchanges, a foreign entity may list its shares or depository receipts representing its underlying shares on the KRX. In addition, the KRX can serve as the primary listing exchange for unlisted foreign entities desiring to conduct an IPO (the Primary Listing) or the secondary listing exchange for foreign entities that are already listed on a foreign stock exchange (the Secondary Listing). Typically, the listing of shares for Primary Listing and the listing of the Depository Receipts for Secondary Listing are the preferred form of listing, although this is not always the case. Obviously, there are two clear advantages in listing Depository Receipts for Secondary Listing. Firstly, the Depository Receipts are technically domestic securities issued by the Korea Securities Depository (KSD) based on the underlying shares of the foreign entity which are Table 1 Company Name (Country) Market (Listing Date) Type of Listing 1 3NOD Digital Group Co Ltd 17 August Huafeng Group Holdings Limited 3 Cowell e-holdings Inc 4 United Technology Holdings Company Limited 5 China Food Packaging Inc Ltd 6 Nepro IT Co Ltd (Japan) 7 China Ocean Resources Co Ltd 8 China Great Star International Limited 9 China Engine Group Limited (China, Hong Kong Holding Company ) 10 Global SM Tech Limited 11 China Hao Ran Recycling Co Ltd 12 China King-Highway Holdings Limited 13 New Pride Corporation (USA) 14 East Asia Sports International Limited 15 Wayport (HK) Co Limited 16 Shenglong PV-Tech Investment Co Limited KOSPI 26 November January 2008 KOSPI 4 December March April 2009 KOSPI 22 May May December December February March April April July September 2010 Primary Listing, Depository Receipts Primary Listing, Depository Receipts Volume 8 Issue 8,

4 Special report Flow Chart of KRX Listing Procedures Preparation for Listing 3-6 months Consultation with the KRX Appointment of Managing Underwriter Due Diligence / Amendment of AOI Application for Listing Eligibility Review Preliminary Review of Listing Eligibility 1-2 months Review of the Application by the KRX Deliberation by Listing Committee Notification of Approval by the KRX Filing of Securities Registration Statement Public Offering 1 month Book Building / Pricing Subscription / Allotment / Payment Listing 3-10 days Application for Initial Listing Listing Approval & Trading well-suited to the real stockholder system in Korea. 1 Secondly, in order to shift shares between the primary and secondary listing exchanges, an agreement regarding the migration of shares between the depository and the registrar of the two listing exchanges is required. However, the KSD, which acts as the depository and the registrar in Korea, has not entered into any agreements regarding the migration of shares with any foreign depository and registrar and thus real-time migration of shares will not be possible. In contrast, the conversion of Depository Receipts into original shares may be possible within one or two business days pursuant to the deposit agreement between the issuer of the shares and the depository. Considerations for the KRX listing of foreign companies The KRX listing requirements do not differ between Korean companies and foreign companies. However, foreign companies are subject to additional submission of documents and disclosure to explain the differences between the legal systems of the country where they are established or listed and Korea. To this end, a foreign entity is required to submit the legal opinions of its counsel and a checklist of articles of incorporation at the time it submits its preliminary application for listing eligibility. The legal opinions must be provided by counsel from the foreign entity s jurisdiction of establishment or listing, as well as its Korean counsel. Further, if the foreign entity that is seeking the KRX listing is a holding company, the legal opinions of counsel from the jurisdictions where its subsidiaries are incorporated must also be included. The legal opinions must be submitted when the preliminary application for listing eligibility is submitted to the KRX and when the SRS is filed with the FSS. The opinions submitted with the preliminary application must authenticate the validity of the preliminary application and its attached documents, and the counsel providing the legal opinions of the jurisdictions where the foreign entity (or its subsidiaries) is incorporated or listed therefore have the burden of verifying the results of their due diligence on the foreign entity (or its subsidiaries). On the other hand, the legal opinions to be submitted with the SRS to the FSS are largely similar to those submitted to the KRX, 36 ASIAN-COUNSEL

5 To list or not to list? Chang Hyeon Ko and Seong-Koo Cheong, Kim & Chang provided that the legal opinions form a part of the SRS and are thus disclosed to the public. As a result, counsel remain liable to the investors for any material misstatements made in the opinions. The KRX also requires submission of the checklist of articles of incorporation to compare the rights of shareholders and the corporate governance of foreign entities to those of Korean companies. Without much exception, the KRX requires foreign entities to amend their articles of incorporation, where necessary, to elevate the rights of shareholders and corporate governance standards to those that are applicable to Korean shareholders and companies. In principle, such amendments must be completed prior to the submission of the preliminary application for listing eligibility and as a result, foreign entities contemplating KRX listing have the burden of amending their articles of incorporation prior to the confirmation of their listing eligibility. Amending articles of incorporation Some of the main issues regarding the amendment of articles of incorporation as required by the KRX are as follows (the issues listed below are mandatory amendments required by the KRX, to the extent that such issues do not violate the laws of the applicable countries): (1) Meeting of the shareholders: Any shareholder that owns or controls more than 3 percent of the total issued and outstanding shares must be able to convene a meeting of the shareholders. Any notice to convene such meeting must be sent at least two weeks prior to the date of the proposed meeting. Important matters, such as amending the articles of incorporation and mergers, must be subject to a special resolution of the shareholders that requires consent from at least two-thirds of the shareholders attending the meeting, or at least one-third of the total issued and outstanding shares. (2) Directors: Outside directors must compose at least onefourth of the board of directors and must be nominated through an outside director candidate recommendation committee. The compensation of the directors must be set forth in the articles of incorporation or through resolution at the meeting of the shareholders. (3) Internal auditor or audit committee: At least one standing internal auditor must be appointed through resolution of the meeting of the shareholders. In cases where the total assets of the company as at the end of the most recent fiscal year exceed KRW 2 trillion (approximately US$1.77 billion), the company must establish an audit committee. The internal auditor or the audit committee must have rights to audit the financial records and operations of the company and must have a right to participate in the board meetings and to convene a meeting of the shareholders. The audit committee must comprise three or more directors, of which more than two-thirds of the committee members are outside directors. The chairman of the audit committee must be an outside director. (4) Preemptive rights: The shareholders must have rights to subscribe newly issued shares in proportion to their shareholding. A special resolution at the meeting of the shareholders or a specific provision in the articles of incorporation is required to limit or exclude such preemptive rights. (5) Minority shareholders: Any shareholder that owns or Chang Hyeon Ko the KRX requires foreign entities to amend their articles of incorporation, where necessary, to elevate the rights of shareholders and corporate governance standards to those that are applicable to Korean shareholders and companies. In principle, such amendments must be completed prior to the submission of the preliminary application for listing eligibility and as a result, foreign entities have the burden of amending their articles of incorporation prior to the confirmation of their listing eligibility on the KRX Volume 8 Issue 8,

6 Special report controls more than 3 percent of the total and outstanding shares must have a right to inspect and make copies of the accounting books of the company. (6) Audited financial statements: The company must submit the financial statements audited by independent auditors to the ordinary shareholders meeting for approval. Such financial statements must be prepared in accordance to the accounting standards approved by the KRX. Conflict of laws with a foreign company s jurisdictions of incorporation As illustrated in Table 1, fourteen of the sixteen foreign entities that are listed on the KRX, as of October 2010 are holding companies incorporated in the Cayman Islands or Hong Kong with Chinese subsidiaries. The remaining two foreign entities are incorporated in Japan and the United States, respectively. Based on the sixteen foreign entities that are listed on the KRX, the conflict of law issues that arose in the listing process for such entities are examined below. (1) Holding companies incorporated in the Cayman Islands or Hong Kong with Chinese subsidiaries All the Chinese companies listed on the KRX are holding companies incorporated in the Cayman Islands or Hong Kong, with subsidiaries incorporated in China. This trend can also be found in stock exchanges outside of China other than the KRX. This is because Article 238 of the Securities Law in China requires prior consent from the Chinese regulatory authorities for companies incorporated in China (Chinese Domestic Companies) to issue or list, directly or indirectly, any securities outside of China. In an attempt to avoid such regulatory requirements, some Chinese Domestic Companies have established holding companies outside of China to list the shares of such holding companies elsewhere. However, from October 2006, Chinese regulatory authorities have required that their prior consent be obtained for any acquisition of Chinese Domestic Companies by any company incorporated outside of China. Therefore, establishment of companies holding Chinese Domestic Companies after October 2006 will be subject to the prior consent requirement of the Chinese regulatory authorities. The holding companies established outside of China that are already listed on the KRX have either been established prior to October 2006 or were holding companies owned by foreigners that were not subject to the prior consent of Chinese regulatory authorities. Recently, there have been some discussions in relation to the possibility of having the holding company incorporated outside China set-up a Chinese subsidiary that will contractually control the Chinese Domestic Company that is the object of the listing, and control the listing of the holding company on a stock exchange outside China. However, the KRX has not approved of such listing to date. (2) Companies incorporated in Japan It is widely understood that companies incorporated in Japan may list Depository Receipts on the KRX but not shares, which stems from the real stockholder system of Korea and Japan. Under Korean law, the name of the shareholder must be listed on the shareholder registry in order for the shareholder to exercise any rights against the company. In cases where the shares listed on the KRX are deposited with the KSD, the shareholders who are listed on the real shareholder Seong-Koo Cheong To benefit from such exemption under Regulation S, the US issuer is required to refuse to register any transfer of the securities not made in accordance with Regulation S by contract or its articles of incorporation. In order to assist this compliance matter, the KRX changed the trading systems to block the acquisition of shares of such company by a US person for one year from the listing. However, one may argue that such restriction is not legally permissible since only freely-transferrable shares may be listed on the KRX under Korean law 38 ASIAN-COUNSEL

7 To list or not to list? Chang Hyeon Ko and Seong-Koo Cheong, Kim & Chang registry maintained by the KSD are deemed to have the same rights as shareholders listed on the shareholder registry maintained by the company (or registration agent). Similarly, in Japan only the shareholders who are listed on the shareholder registry of the company or on the real shareholder registry maintained by JASDEC (the depository in Japan that is similar to the KSD) are acknowledged as shareholders of the company. As a result, the shareholders who are listed on the real shareholder registry maintained by the KSD shall not be deemed to be the shareholders of such company under Japanese law. As long as such issue remains outstanding, companies incorporated in Japan will be limited to listing the Depository Receipts on the KRX. (3) Companies incorporated in the United States. In order for a company incorporated in the United States (US Issuer) to be listed on the KRX, the issuance of new shares must be through Regulation S of the United States Securities Act of 1933, which exempts the filing of a registration statement in the US. To benefit from such exemption under Regulation S, the US issuer is required to refuse to register any transfer of the Endnote 1 Under the real stockholder system, sellers and buyers trading the shares on the KRX will be treated as a genuine shareholder in all legal and substantive respects. securities not made in accordance with Regulation S by contract or its articles of incorporation. In order to assist this compliance matter, the KRX changed the trading systems to block the acquisition of shares of such company by a US person for one year from the listing. However, one may argue that such restriction is not legally permissible since only freely-transferrable shares may be listed on the KRX under Korean law. In addition, the United States Securities Exchange Act of 1934 requires the filing of the registration statement for companies that have total assets of more than US$10 million and more than 500 shareholders. As mentioned above, for companies listed on the KRX, the KSD maintains the real shareholder registry and all shareholders listed on such real shareholder registry shall be deemed a shareholder of such company under Korean law. Therefore, it is likely that the company incorporated in the US that is listed on the KRX has more than 500 shareholders. However, the company incorporated in the US that is listed on the KRX did not file a registration statement in the United States, which may become an issue. chko@kimchang.com skcheong@kimchang.com In next month s issue India Special Report Whilst 2009 was a year marked by low valuations and minimal liquidity opportunities in India, the scarcity of growth capital has abated in the last year, and 2010 has seen deal flow momentum continue to grow. India is currently dominating the league tables when it comes to project finance deals in Asia Pacific, and whilst infrastructure projects will continue to play a significant role, so too will the resources sector as organisations scout the global market for oil and gas assets in an effort to address the needs of an ever-growing population. Other sectors, including telecommunications, real estate and micro-finance, also have roles to play. In the upcoming edition of Asian-Counsel, we take a look at which sectors are on the move and which steps have been taken as part of the Government s efforts to promote Foreign Direct Investment through a transparent policy framework, and inquire as to whether the potential liberalisation of India s legal sector, a much-discussed topic for many years now, is likely to stay on the backburner for some time after prominent international firms were recently shown the door. For information on how to contribute asian-counsel@pbpress.com Volume 8 Issue 8,