The South Korean government plans to strengthen the delisting process for failing companies starting July 1, aiming to address the Korea discount. A wave of exits for struggling firms is anticipated, increasing the need for proactive measures to ensure survival. How should companies prepare?
The delisting response team at Law Firm Gwangjang stated, "This regulatory overhaul is not merely a tightening of rules; it signifies a fundamental shift in the standards the market demands from companies." They noted that the market is moving towards a structure where only those managing their corporate value and compliance systems will survive, rather than relying on short-term stock price management or merely meeting formal requirements.
In a recent interview with attorneys Jo Jun-woo and Park Hyun-soo, the team discussed survival strategies for struggling companies. This specialized group includes experts in financial regulation, capital market regulation, accounting audits, corporate consulting, litigation, bankruptcy, and criminal law. They have established a comprehensive response system from the Korea Exchange to investigative agencies and court litigation, including the notable Gamanu case, which successfully overturned a previous delisting decision.
"Once designated as a management issue, it's too late... Mergers and capital reductions are not fundamental solutions"
Starting July 1, the criteria for delisting based on market capitalization and stock price continuity will be tightened. Previously, companies only needed to exceed the criteria for 30 days within a 90-day trading period, but now, if a stock remains below 1,000 won for 30 consecutive trading days, it will be designated as a management issue. Companies must then recover the criteria for 45 consecutive trading days within 90 trading days. The market capitalization thresholds will also increase, with the KOSPI rising to 30 billion won (50 billion won next year) and the KOSDAQ to 20 billion won (30 billion won next year).
Jo Jun-woo emphasized, "The requirement for a 45-day continuous recovery can be a significant burden for struggling companies. Simply merging stocks or reducing capital to escape immediate crises is not a fundamental solution." He added, "Once designated as a management issue or trading is suspended, a stigma effect occurs in the market, making it very difficult to recover stock prices in a short time, even with external expert intervention."
Ultimately, to survive in the market, companies must focus on enhancing their intrinsic value through attracting investment, mergers and acquisitions, exploring new business opportunities, and increasing shareholder returns.
Park Hyun-soo noted, "There are clear limitations to responding to problems after they arise. The paradigm is shifting to one where thorough compliance is essential, and companies must seek external expert assistance proactively."
Post-Gamanu Market Changes... "An era of proactive management rather than post-fact remedies"
Gwangjang interprets the current tightening of delisting regulations as a continuation of the changes initiated after the Gamanu case, which overturned a delisting decision in 2018.
Park explained, "In cases like the 2007 Chungnam Spinning incident, the terms themselves were deemed invalid. However, Gamanu was the first case where a court ruled that an individual delisting decision made by the exchange was invalid due to abuse of discretion."
Gamanu faced delisting due to the auditor's refusal of opinion. Gwangjang filed for a suspension of the delisting's effectiveness, which the court accepted. Following a re-audit that secured a favorable opinion, the delisting was overturned.
Park pointed out that the corporate review committee failed to conduct sufficient reviews as it assessed multiple companies simultaneously in a short period. He demonstrated that the delisting decision was hasty through witness testimonies from accounting experts.
Since then, the exchange has adjusted its review procedures and the duration for improvement. However, concerns have been raised that this has delayed the exit of failing companies, leading financial authorities to readjust policies to strengthen delisting procedures in line with market cleansing and value enhancement.
Nonetheless, Gwangjang emphasizes that the tightening of exit regulations and procedural legitimacy are separate issues.
Recent cases like Selphiglobal, where the court granted a suspension of delisting, were based on whether sufficient opportunities for improvement were provided.
Park stated, "Delisting without reasonable opportunities for improvement can still be scrutinized strictly by the courts, and as the number of companies facing delisting increases, judicial review is likely to become more sophisticated."
Small listed companies should be cautious of disclosure errors... "An era of integrated responses rather than litigation"
Gwangjang specifically warned of increased risks for small KOSDAQ-listed companies with weak disclosure infrastructure.
Jo noted, "KOSDAQ companies often experience frequent changes in management and major shareholders, leading to a lack of specialized disclosure personnel. Even without intent, companies may fail to recognize their disclosure obligations or misinterpret regulations, resulting in grounds for delisting."
He advised that responses should consider industry-specific characteristics. For sectors like IT or manufacturing, which are highly seasonal, relying solely on semi-annual performance can create misleading impressions of financial health, making it crucial to explain potential recovery to the exchange.
For companies listed under technology special listings, demonstrating efforts to attract external funding and enhance intrinsic value from a legal perspective is essential.
The Gwangjang response team stated, "We agree with the government's direction for market cleansing and value enhancement. Given that this is a matter of corporate survival, it is vital to establish a comprehensive response system that considers exchange responses, financial and accounting audits, rehabilitation, and criminal issues from the early stages."
* This article has been translated by AI.
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