In a third-party allotment (jeja-baejeong), a Korean listed company may price new shares no more than 10% below the reference price. Compare that with a public offering (30% cap) or a rights issue with unsubscribed shares sold publicly (40% in practice), and the third-party route looks like the gentlest of the three. It is not. It is the only one where existing shareholders have no way to recover what they lose, because they are not on the list receiving the new shares.
Three numbers in the filing decide everything: how many shares will be issued, at what price, and by which allotment method. With those, the post-issue theoretical price and the dilution rate can be worked out on paper. The rest of the announcement is commentary.
Why there are three allotment methods
A rights issue hands subscription rights to existing shareholders in proportion to their holdings. A public offering opens subscription to anyone. A third-party allotment gives the new shares only to parties the company names — typically a venture investor or a strategic partner.
That last route carries a legal gate. As Help Me explains, Article 418(2) of the Korean Commercial Act limits it to cases genuinely needed for business purposes such as introducing new technology or repairing the balance sheet. If the articles of incorporation permit it, a board resolution suffices; if not, a special shareholder resolution is required — two-thirds of votes present and at least one-third of all issued shares. An issue aimed purely at entrenching management can be voided in court.
The discount caps follow the same logic. Materials from Korea Investment & Securities put the cap at 30% for shareholder-priority and general public offerings, but only 10% for third-party allotments. When existing holders cannot participate, a deep discount simply transfers value out of the company.
| Method | Discount cap | Who receives shares | Existing holder access | Approval needed |
|---|---|---|---|---|
| Rights issue | Effectively at the company's discretion (40% customary when unsubscribed shares go public) | All existing shareholders | Pro rata | Board |
| Public offering | 30% | General public | Competitive subscription | Board |
| Third-party allotment | 10% | Parties named by the company | None | Charter clause or special resolution |
Which day's price sets the issue price
The reference price is not a closing price but a volume-weighted arithmetic average. Under Article 5-18 of the Regulation on the Issuance and Disclosure of Securities, the day before the board resolution is the base date. Three figures are taken — the weighted average over the past month, over the past week, and on the most recent day — and the reference price is the lower of their arithmetic mean and the most recent day's figure.
Put numbers in. If the one-month average is 11,000 won, the one-week average 10,400 won and the most recent day 10,100 won, the mean of the three is (11,000+10,400+10,100)÷3 = 10,500 won. Since 10,100 is lower, that becomes the reference price, and a 10% discount puts the issue price at 9,090 won.
The formula pushes the issue price down in a falling market, because the most recent figure sits below the average. In a rising market the mean is chosen instead, still leaving the issue price below the latest quote. Either way, the price action just before the board meeting sets the terms.
Shares issued privately this way come with a lock-up. Third-party allotment filings on the Korea Exchange's KIND system state that the new shares are held in deposit for one year from the listing date. The recipient cannot sell into the market immediately — and a block of supply becomes free exactly one year later.
What 2 million new shares do to value per share
Take a company with 10 million shares outstanding at 10,000 won, a market capitalisation of 100 billion won, issuing 2 million new shares. The share count afterwards is 12 million under every method. What differs is how much cash the company collects.
| Method | Issue price (KRW) | Proceeds (KRW bn) | Theoretical price after (KRW) | Change per share (%) | Recovery available? |
|---|---|---|---|---|---|
| Third-party (10% discount) | 9,000 | 18.0 | 9,833 | -1.67 | None |
| Public offering (30%) | 7,000 | 14.0 | 9,500 | -5.00 | Competitive subscription |
| Rights issue, unsubscribed shares public (40%) | 6,000 | 12.0 | 9,333 | -6.67 | Exercise the rights |
The arithmetic: theoretical price equals (prior market cap + proceeds) ÷ shares outstanding after. For the third-party case, (100bn + 18bn) ÷ 12m = 9,833 won; for the 40% rights issue, (100bn + 12bn) ÷ 12m = 9,333 won. Deeper discounts bring in less cash, so the theoretical price lands lower.
On the table alone, -1.67% looks best. Follow the rights-issue holder through, though, and it reverses. A holder of five shares receives one more at 6,000 won. Total outlay is 5×10,000 + 6,000 = 56,000 won for six shares, an average of 9,333 won — identical to the theoretical price. The net effect is zero. A holder who declines can also sell the subscription right in the market.
The third-party case offers neither option. That -1.67% is small but locked in, and the existing base falls from 100% to 83.3% (10m ÷ 12m) of the company. Scale the issue to 50% of existing shares and the same 10% discount pushes ownership down to 66.7%.
The method with the smallest discount is not the friendliest to existing holders. Without the right to participate, dilution cannot be undone.
Where the same filing reads as good news or bad
Dilution is the cost; what the company bought with it is the other half. Three fields in the filing do the separating: who receives the shares, what the money is for, and how large the issue is.
If the recipient is an operating company or a parent with a business link, something beyond cash — a customer relationship, technology — arrives with it. If the recipient is an individual or a newly formed investment partnership and the filing states no relationship with the largest shareholder, assume cash is all that arrives. Purpose matters the same way: capital expenditure and acquisitions leave an asset behind, while working capital is simply consumed.
The frame breaks in two directions. Debt repayment sounds defensive, yet if the interest saved is large enough, earnings per share can rise despite the higher share count — the mirror image of how share buybacks and cancellations move the share count and EPS. Conversely, even a strategic investor deserves scepticism when the payment date slips and correction filings pile up. Unlike physical and personnel spin-offs, where new shares and the ex-rights price are allocated to holders, a third-party allotment gives existing shareholders no allocation at all. That is the starting point for judgement.
What to watch
- New shares ÷ shares outstanding before — above 20%, calculate the dilution first
- The issue price, the reference price, and the price action just before the board resolution
- The recipient's name and whether a relationship with the largest shareholder is disclosed
- The breakdown of use of proceeds — capex, working capital, debt repayment, acquisitions
- The payment date, plus any history of delays and correction filings
- The end of the one-year lock-up — the date that supply becomes tradable
- Outstanding convertible and warrant bonds, which reserve further dilution