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Global standard finally to be adopted in Korea
By Anna J. Park
In a move to strengthen the protection of minority shareholders, the Korean government aims to adopt a mandatory bid rule in the country's capital market as early as 2024. If the rule is adopted, any person or entity that plans to take over a company through a stock purchase deal is legally required to offer to the remaining minority shareholders a buy-out of all their shares at an equitable price.
According to the financial authorities, including the top policy maker, the Financial Services Commission (FSC), and market bourse operator Korea Exchange (KRX), the government aims to revise relevant laws to include the mandatory bid rule next year. As a grace period of at least 12 months will be granted before the revision takes full effect, it is expected that the rule will take force in Korea as soon as 2024.
"While most M&As in Korea have been done through stock transfer deals, there has been a consistent criticism that the Korean financial law framework was significantly lacking in protection for minority shareholders during the process, which is starkly different from the situations of other major global markets like the EU, Japan and the U.S." Kim So-young, vice chairman of the FSC, said during a recent seminar co-hosted by the FSC and the KRX.
The FSC vice chief explained that the government plans to bring forth the principle of equality among shareholders through the introduction of the mandatory bid rule, as minority shareholders could also be able to enjoy a management premium as major shareholders.
Originated in the U.K., the mandatory bid rule has now been a global standard for the goal of protecting minority shareholders, as most countries have legal provisions requiring it. Although specifics of the rule vary in each country, it is generally considered to prevent predatory acquisitions. The notable exception is the U.S., which does not have the provision in its legal system. Yet, corporations of the U.S. have very active boards as well as civil lawsuits, which protect minority shareholders aggressively.
"Only a very few countries like Korea and the U.S. do not have a legal requirement for the mandatory bid. But in the U.S., controlling stakeholders have a responsibility to take over the remaining minority shares, when they purchase the management rights of a company," Choi Nam-kon, an analyst at Yuanta Securities Korea, pointed out.
Minimum of 50-percent stake purchase obligation to alleviate burden in M&As
The FSC's revision bill stipulates that any person or entity aiming to control a publicly listed company by acquiring more than 25 percent of its shares is obliged to make a bid to acquire at least 50 percent of all of the shares.
Considering criticisms that the rule puts too much burden on M&A costs, the revision bill requires the buyer to purchase a minimum of a 50-percent stake plus one more share. It means that if an individual or entity aims to become the largest shareholder of a company by taking over a 40-percent stake of the company shares, they're required to purchase an additional 10-percent stake plus one more share to satisfy the mandatory bid rule.
The financial authority explains that it seeks to strike a balance between protecting shareholders and fostering the M&A market through the introduction of the rule. Other jurisdictions, like the EU, U.K. and Germany, obligate the buyer of a company to bid for the entirety of the remaining minority shares.
Despite such alleviations of the rule, private equity firms and investment bankers express concerns that the changed rule could hamper more agile M&A deals in the country.
Korea actually adopted a mandatory bid rule in the late 1990s, but it ended up repealing the rule just a year after its introduction, amid the economic turmoil during the Asian financial crisis.
The strengthened protection of minority shareholders in M&A deals is one of 120 key national policy priorities set forth by the Yoon Suk-yeol administration.
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