Four out of 10 Kosdaq firms face scrutiny for noncompliance in auditor rule

2020.02.13 14:21:22 | 2020.02.13 15:09:50

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A bulk of companies listed on South Korea’s junior bourse Kosdaq could end up on the stock exchange operator’s special watch list after general shareholders meeting this year due to anticipated challenges in recruiting new auditors under toughened shareholder voting rules.

According to Kosdaq Listed Companies Association on Wednesday, 544 companies or 41.9 percent of total 1,298 companies whose fiscal year ended December 31 and publicly trading on the junior stock exchange need to elect a new auditor at their general shareholders meeting this year. The companies exclude special purpose and foreign companies.

If a company fails to appoint a new auditor required under local commercial law to secure transparency in management, it could go under the stock exchange operator’s administrative watch list for being incompliant with disclosure rules. Repeated violators can face a delisting review.

But it has become increasingly challenging for companies, especially those listed on Kosdaq, to elect an auditor after the shadow voting was abolished in late 2017.

Shadow voting, also known as mirror voting, allows Korea Securities Depository to proxy vote on behalf of shareholders in the same proportion of approvals and non-approvals of voters who attended shareholders meetings. It was introduced in 1991 to make up for the gap created by the so-called 3 percent rule.

For a proposal to get official approval from shareholders, it must gain support by at least a quarter of the company’s outstanding shares and more than half of votes by shareholders present at the shareholders meeting. But the local commercial law limits the voting right for largest shareholder and its affiliates to 3 percent when electing an auditor, meaning that the rest of consent must come from minority shareholders who tend to be less active in participating in the shareholders meeting.

Last year, 490 Kosdaq companies that settled accounts in December planned a vote to appoint a new auditor but 125 failed to elect one.

The Korean Listed Companies Association plans to request the legislature to abolish the 3-percent rule and lower the number of required votes.

By Chung Seung-hwan and Cho Jeehyun

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