The Meaning of 1,000 Won Per Share
For listed company executives, 1,000 won is no longer just a stock price. If the closing price remains below 1,000 won for 30 consecutive trading days, a company may be designated as an administrative issue under the penny stock criteria. If the stock then fails to maintain a price of 1,000 won or higher for 45 consecutive trading days within the following 90 trading days, the risk of delisting becomes real. Penny stocks may sound trivial, but their regulatory consequences are anything but light.
The market immediately turned its attention to stock consolidation as a potential solution. If 10 shares trading at 100 won each are consolidated into one share, the post-consolidation reference price arithmetically becomes 1,000 won. The company's business remains unchanged, but the displayed price multiplies tenfold. Revenue, operating cash flow, and assets remain the same. Yet the stock price on trading terminals changes. Viewed purely in terms of price, stock consolidation appears to be the fastest and most direct remedy for delisting risk.
It is only natural that the Korea Exchange has targeted precisely this point. The initial proposal considered including cases where the post-consolidation price falls below par value as a delisting criterion. The intent was to prevent companies from circumventing the penny stock requirement through par-value consolidation that merely raises the displayed price. However, this approach had structural limitations. Par-value standards do not apply to no-par-value shares. Companies could also work around the rule through capital reductions that do not change par value. Accordingly, the direction of the re-announced proposal shifted. The core aim is to restrict attempts to evade the penny stock requirement through repetitive or excessive stock consolidations and capital reductions.
The first benchmark to verify here is the "date of administrative issue designation as a penny stock." This refers not to the designation date under other criteria, but to the date on which the company was designated as an administrative issue specifically for penny stock reasons after the stock price remained below 1,000 won for 30 consecutive trading days.
Under the re-announced proposal, a listed corporation that completed a stock consolidation or capital reduction within the one year preceding the date of penny stock administrative issue designation cannot carry out another stock consolidation or capital reduction within 90 trading days after that designation date. Even without such history in the preceding year, any stock consolidation or capital reduction conducted within 90 trading days after the penny stock administrative issue designation date cannot exceed a total ratio of 10 to 1. Violations become grounds for delisting.
KOSPI Company or KOSDAQ Company?
Companies considering stock consolidation must first confirm "which regulations apply to our company" before deciding "at what ratio to consolidate."
KOSPI and KOSDAQ have different rules on par value. In KOSPI, if the value of one share is 5,000 won or less, it must be one of 100 won, 200 won, 500 won, 1,000 won, 2,500 won, or 5,000 won. If it exceeds 5,000 won, it can be set in multiples of 10,000 won. In KOSDAQ, the par value per share for par-value stocks must be set at 100 won, 200 won, 500 won, 1,000 won, 2,500 won, or 5,000 won. This difference is not insignificant in practice. For example, if a stock with a par value of 1,000 won undergoes a 10-to-1 par-value consolidation, the post-consolidation par value per share becomes 10,000 won. This par value is permitted in KOSPI but conflicts with the par value requirements in KOSDAQ.
Share distribution requirements also differ. In KOSPI, the issue in principle arises when the number of general shareholders on the business report is less than 200, or when the number of shares held by general shareholders is less than 5% of the floating shares. In KOSDAQ, the issue in principle arises when the number of minority shareholders is less than 200, or when the number of shares held by minority shareholders is less than 20% of the floating shares. The higher the consolidation ratio, the more fractional shares arise, and through cash settlement of fractional shares, the number of general or minority shareholders and their holdings may decrease.
One Term, Three Meanings of Stock Consolidation
The term "stock consolidation" is singular, but its practical meaning divides into three main categories.
The first is stock consolidation accompanied by a capital reduction. If 10 shares with a par value of 500 won are consolidated into one share with a par value of 500 won, the number of issued shares is reduced to one-tenth, and capital is also reduced to one-tenth. This is a capital reduction. Whether it is a capital reduction for deficit compensation or an ordinary capital reduction determines the shareholders' meeting resolution requirements and creditor protection procedures. If the company's purpose is to clear deficits and restructure its capital, this approach may be necessary. However, in addressing penny stock issues for the purpose of maintaining listing, one must not forget that capital reduction simultaneously touches on other listing requirements, accounting, and disclosure issues.
The second is so-called par-value consolidation, in which capital itself is not reduced. If 10 shares with a par value of 500 won are consolidated into one share with a par value of 5,000 won, the number of issued shares decreases, but since the par value per share increases, capital remains unchanged. While there are some theoretical debates, this method has long been widely used in listed company practice. In this case, because the par value per share in the articles of incorporation must be changed, a special resolution at the shareholders' meeting and procedures for modified listing become central. Par-value consolidation does not increase the company's net assets. However, the displayed price, the number of shares in circulation, and the shareholder composition following fractional share treatment do change.
The third is conversion to no-par-value shares or consolidation in a no-par-value state. Since no-par-value shares have no par value per share, par-value-based calculations do not apply. The no-par-value share system offers the advantage of more flexibly designing the relationship between capital and the number of issued shares, without being constrained by par value options.
Considerations in Setting the Consolidation Ratio to Resolve Penny Stock Requirements
The most dangerous approach in setting a consolidation ratio is simply multiplying the current stock price by a factor. The reasoning that "the stock price is 300 won, so a 5-to-1 consolidation will bring it to 1,500 won, exceeding the 1,000-won threshold" is insufficient. The post-consolidation reference price rises arithmetically, but there is no guarantee that the post-consolidation stock price will maintain that level. If reduced circulating shares immediately after consolidation, existing shareholders' selling sentiment, distrust of the financial structure, and the burden of potential shares such as convertible bonds and bonds with warrants all emerge at once, the stock price may fluctuate again.
The recovery requirement after penny stock administrative issue designation is not that the price exceeds 1,000 won on any single day. The price must remain at 1,000 won or higher for 45 consecutive trading days within 90 trading days. This means the consolidation ratio needs a buffer. A consolidation that barely reaches 1,020 won or 1,050 won is precarious in practice. A single day's selling pressure can push it back below 1,000 won.
Legally, the consolidation ratio need not be a neat whole-number ratio such as 5 to 1 or 10 to 1. However, in listed company practice, irregular ratios significantly increase the burden of fractional shares, electronic registration, disclosure, investor communication, and modified listing procedures. The consolidation ratio is not merely a question of "by how many times to raise the stock price." It is a question of whether the post-consolidation stock price, par value, share distribution, fractional shares, liquidity, potential shares, and modified listing schedule can simultaneously comply with listing regulations.
Fractional Shares: A Matter of Cash Settlement and Shareholder Status
Stock consolidation almost always generates fractional shares. When 10 shares are consolidated into one, a shareholder holding nine shares receives no share after consolidation and becomes subject to cash settlement. The Commercial Act stipulates that when shares in quantities unsuitable for consolidation exist, the new shares issued for that portion shall be sold and the proceeds paid to the former shareholders. For listed stocks, the sale premised on exchange market prices and cash settlement practices follow.
Fractional shares are far from trivial from the perspective of shareholder status. Shareholders left holding only fractional shares as a result of consolidation may lose their shareholder status. However, the Supreme Court has ruled that when a consolidation at the same ratio applies to all shareholders and the fractional share procedures under the Commercial Act are followed, the mere fact that some shareholders lose shareholder status does not in itself constitute a violation of the principle of shareholder equality.
Before consolidation, companies must simulate the post-consolidation number of shareholders and the post-consolidation holding ratios of general or minority shareholders. Simply examining how the total number of issued shares will decrease is insufficient. The shareholder register as of the record date, the beneficial shareholder list, holdings of the largest shareholder and specially related parties, treasury shares, mandatorily held shares, methods of calculating floating shares, the expected scale of fractional shares, and cash settlement of fractional shares must all be taken into account.
