Revisions To The Regulation On Management Of Listing Via M&A On The KOSDAQ Market Of KRX

The KOSDAQ Market of Korea Exchange(KRX) has revised the Listing Regulation to incorporate measures designed to ensure efficient management of companies listing shares via M&A(back door listing) and modify the provisions relating to listing and exit. The revised regulation which has been recently approved by the Financial Supervisory Commission (FSC) will become effective on December 12, 2005.

Key Changes

1. More Efficient Management of Listing via M&A to Enhance Market Integrity

The scope of application of the lock-up regulation has been broadened and the lock-up period will differ according to the case.

* Applicable to shares owned by the largest shareholder, etc. of a private corporation listing its shares via M&A(back door listing)

The scope of application of the lock-up system
(Current) M&A, comprehensive stock swap => (Revised) M&A, comprehensive stock swap, transfer of business(asset) & third party allocation, stock swap
The lock-up period(currently two years) will range from one year to three years according to the nature of M&A.

* Business transfer & third party allocation: A pre-IPO company transfers its business to a KOSDAQ-listed company, and the pre-IPO company or the largest shareholder thereof participates in the capital increase through third party allocation by the KOSDAQ-listed company within 6 months after the business transfer.
** Stock Swap: The largest shareholder of a pre-IPO company transfers the stock to a KOSDAQ-listed company and participates in the capital increase through third party allocation by the KOSDAQ-listed company within 6 months after the transfer.

Expected Effects :

1. The scope of post-listing monitoring will be widened for companies listing shares via M&A(back-door listing), which will raise the effectiveness of the regulation.
2. Companies will be guided to engage in back door listing practice in a way that can help the restructuring of KOSDAQ-listed firms, thereby facilitating M&A activity.

? The revised rules shall be applicable to companies that filed the notification of M&A, a stock swap or business(asset) transfer after December 12, 2005(inclusive).

3-Tiered Lock-Up Period

Since responsible management by the largest shareholder is a critical factor that impacts the business performance of a KOSDAQ-listed company, whether back door listing results in changing the largest shareholder is a key criterion that determines the lock-up period.

If the largest shareholder of the KOSDAQ-listed company remains unchanged, the lock-up period will be shortened to one year from currently two years.

If the largest shareholder of the KOSDAQ-listed company is changed, it will be two years as applicable under the current rules.

However, in case of back-door listing through a merger or a comprehensive stock swap, the lock-up period will be increased by one year to three years if the results of the pre-IPO company for the year immediately preceding the listing application fail to meet the set financial requirements.

* Capital impairment, recurring loss, or debt-to-equity ratio that is 1.5 times or higher than the industry average(or the average of KOSDAQ-listed companies)

Click here for more information on this and the revisions to the regulation on listing and exit