Hello, this is Kim Kwang-Sik, attorney at Cheongchul Law Firm.

The Korea Exchange has been actively pursuing regulatory reform to address so-called dual listings, where a parent company and its subsidiary are both listed on the market. Reports indicate that the exchange is strongly considering the introduction of the ‘3% rule’ as a key tool for this reform. The 3% rule originally limited the voting rights of the largest shareholder to 3% when a listed company elected an auditor or audit committee member. The proposal is to extend this rule to the parent company’s shareholder approval procedure for dual listings.

Financial regulators and the Korea Exchange have outlined a broad framework that, in principle, prohibits new dual listings but permits them exceptionally when certain requirements are met. The core criteria for such exceptions include protection of the parent company’s ordinary shareholders and the form of shareholder approval. Three approval methods have been discussed: a special resolution, application of the 3% rule, and majority-of-minority (MoM) voting. Among these, the 3% rule has emerged as a compromise that protects minority shareholders’ rights while reducing the procedural burden on companies.

Today, we will review the trend of dual listing regulation, the meaning of the 3% rule, its effect on shareholder meetings in practice, and the points listed companies should prepare for.

[Question] What is the ‘3% rule’ currently under review for dual listing regulation, and how does it affect listed companies and their shareholders?

[Answer]

1. Background of dual listing regulation and the ‘prohibition in principle, exception in practice’ framework

A dual listing refers to a structure in which an already listed parent company spins off a core business unit or valuable subsidiary and lists it separately. In this process, a significant portion of the business value held by the parent is transferred to the subsidiary, and when that subsidiary is independently valued by the market, the parent’s ordinary shareholders may suffer dilution of their equity value or a decline in share price. This so-called ‘split-off listing’ issue has long been cited as one of the causes of the Korea Discount.

In response, the Financial Services Commission and the Korea Exchange have proposed restricting new dual listings in principle and allowing them only on an exceptional basis when certain conditions are met, such as the fair creation of new value for all shareholders. The plan emphasizes three requirements together: operational independence, managerial independence, and investor protection. Among these, protection of the parent’s ordinary shareholders and the form of shareholder approval are expected to be the central criteria for exceptional approval.

Ultimately, the focus of regulation has shifted from ‘how to prevent dual listings altogether’ to ‘how, and to what extent, parent company shareholder approval must be obtained when a dual listing is pursued.’ This is the point at which the method of shareholder approval has emerged as the key issue.

2. Methods of shareholder approval: special resolution, MoM, and the 3% rule

Three main methods of shareholder approval have been discussed. The first is a special resolution at a shareholders’ meeting, requiring approval by at least two-thirds of the voting rights present and at least one-third of the total issued shares. The second is majority-of-minority voting, or MoM, which excludes the controlling shareholder’s voting rights and requires a majority of the ordinary shareholders’ approval. The third is the application of the 3% rule.

The special resolution method has the advantage of being a familiar procedure, but in companies where the controlling shareholder holds a large stake, the resolution is effectively decided by the controlling shareholder’s intent, leaving limited protection for ordinary shareholders. Conversely, the MoM method completely excludes the controlling shareholder’s influence and offers the strongest protection for ordinary shareholders, but if minority shareholder participation is low, securing the required quorum becomes difficult and the burden on companies grows excessive.

The 3% rule is regarded as a compromise between the two. Rather than fully excluding the controlling shareholder’s voting rights, it limits them to 3%, allowing ordinary shareholders’ intentions to be substantively reflected in the resolution while easing the burden of securing a quorum. According to reports, the Korea Exchange is strongly considering adopting the 3% rule in light of this compromise nature. However, details such as whether it would apply uniformly to all listed companies or only to certain companies at the exchange’s discretion have not yet been finalized, and the final plan remains fluid.

3. The meaning of the 3% rule and how voting limitation operates

The 3% rule originated in the Commercial Act (상법), which limited the voting rights of the largest shareholder to 3% of the total issued shares when electing auditors or audit committee members. The Commercial Act prevents directors from exerting excessive influence over the appointment of auditors who would oversee them, by aggregating the largest shareholder’s holdings with those of related parties and barring voting rights on the portion exceeding 3%.

The key concepts are ‘aggregation’ and ‘restriction on the excess portion.’ Not only the largest shareholder’s own stake but also the stakes of related parties are added together, and where the combined total exceeds 3%, the voting rights on the excess portion are restricted. For example, even if the controlling shareholder’s aggregated stake amounts to 40%, that party can exercise voting rights only up to 3% on the relevant agenda, while the remaining 37% of voting rights cannot be exercised.

When this approach is applied to the dual listing approval process, the voting influence of the controlling shareholder, who has the greatest interest in the subsidiary’s listing, is substantially reduced, while the votes of ordinary shareholders gain relatively greater weight. In other words, the controlling shareholder formally participates in the resolution, but in substance, the ordinary shareholders’ intentions may decide the outcome. However, because voting rights are restricted, vote tallying and quorum calculation become more complex, so companies must prepare in advance to handle these matters accurately.

4. Points listed companies and investors should review

First, a parent company considering a dual listing should determine in advance how the subsidiary’s listing will affect the parent’s ordinary shareholders and how the shareholder approval process will be designed. If the final guidelines adopt the 3% rule, the company must assess whether it can secure ordinary shareholders’ approval while the controlling shareholder’s voting rights are restricted.

Second, the vote tallying system must be reviewed. If the 3% rule applies, the company must aggregate the holdings of the largest shareholder and related parties, exclude the portion exceeding 3%, and accurately determine quorum sufficiency by reflecting electronic voting, proxies, and institutional investor voting records. While this method has already been used in the appointment of audit committee members, it must be carefully reorganized in advance to avoid confusion when applied to the new agenda of dual listing approval.

Third, the role and responsibility of the board of directors should be examined. As the amended Commercial Act has strengthened directors’ duty of loyalty, while the decision on dual listing is essentially a matter of business judgment, an independent review procedure is advisable when there is a possibility of conflict of interest. Separately from the shareholder approval process, whether the board conducted sufficient review and communication to protect ordinary shareholders may later become a contested issue.

Fourth, from the investor’s perspective, it is necessary to pay close attention to subsidiary listing plans of portfolio companies and the corresponding shareholder approval procedures. If the 3% rule is introduced, ordinary shareholders’ intentions may have a substantive impact on whether a dual listing proceeds, making it important to verify the agenda items, voting methods, and satisfaction of approval requirements.

Dual listing regulation is not simply a matter of prohibiting or permitting listings, but a governance issue concerning how to protect the rights of the parent company’s ordinary shareholders. The 3% rule is being reviewed as a compromise that reflects ordinary shareholders’ intentions while easing the procedural burden on companies, but its scope and detailed requirements have not yet been finalized, so the contents of the final guidelines must be carefully monitored.

In particular, for listed companies in which the controlling shareholder holds a large stake, the voting structure may change significantly when the 3% rule applies, so the overall subsidiary listing strategy should be reexamined. Moreover, since voting restrictions and quorum calculation can determine whether a resolution is validly adopted, it is safest to thoroughly review them together with the operation of the shareholders’ meeting in advance.

Cheongchul Law Firm provides legal advice on the governance of listed companies, the design of shareholders’ meeting agendas, the review of voting restrictions on special interested parties and under the 3% rule, and legal advice related to subsidiary listing structures. If you need to respond to changes in dual listing regulation, we recommend a proactive review of the entire structure from the stage before the guidelines are finalized.