The Financial Services Commission (the “FSC”) recently announced its plan to introduce a mandatory bid rule, which would grant the minority shareholders of listed companies an opportunity to sell their shares when a change of control takes place through transfer of stocks.
The Korean Commercial Code (the “KCC”) currently provides measures to protect shareholders in case of mergers/business transfers by granting appraisal rights to dissenting shareholders and requiring, as a pre-requisite for the approval of such transactions, a special resolution of the general meeting of shareholders. However, critics have voiced that the KCC lacks sufficient measures to protect minority shareholders of companies in cases of acquisitions through stock transfers, which account for the majority of M&A deals in Korea.
Taking into account the aforementioned, the FSC held a seminar with the Korea Exchange (the “KRX”) and the Korea Capital Market Institute (the “KCMI”) on December 21, 2022, regarding “measures to protect general shareholders in cases of change of control via stock transfer.” In the seminar, the FSC announced its plans to amend the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”) to introduce a mandatory bid rule regarding change of control via stock transfer and, through this, to move one step forward toward attaining the principle of shareholder equality by allowing minority shareholders to share control premium with controlling shareholders.
1. Overview of Discussions on Introduction of Mandatory Bid Rule
One of the New Administration’s “110 National Tasks” was its plan to prepare measures to protect minority shareholders in cases of change of control via stock transfer, with the aim of enhancing fairness in the Korean capital market and gaining trust from investors.
Accordingly, during the “Policy Seminar for Enhanced Investor Protection in the Stock Market” (June 17, 2022) and the “Policy Seminar for Removing Korea Discount” (September 15, 2022) held by the FSC, discussions were held on possible measures to strengthen shareholders’ rights in stock transfer M&As. In particular, many of the participants formed a mutual understanding on the need to mandate, as in other major countries’ relevant regulations, an acquirer to make a tender offer to minority investors when said acquirer is attempting to acquire control over a particular listed company through the acquisition of a certain percentage of the relevant entity’s shares.
2. Legislative Examples of Mandatory Bid Rules in Other Countries
As major countries have already implemented mandatory bid rules as set forth below, relevant domestic authorities may refer to these legislations in setting out the details of the rules.
While there are subtle differences regarding the specific details of each nation’s regulations, the EU, UK and Japan all require acquirers to make a tender offer upon acquiring certain number of shares enough to exercise control over a listed company. When making a tender offer, the UK requires the relevant offer price to be the highest price paid during the 12-month period before the commencement of the offer, while Japan requires the offer price to be equal to or higher than the price paid to the controlling shareholder.
In the United States, some states (e.g., Delaware) allow an acquirer of a certain percentage of shares to acquire additional shares only upon the board of directors’ approval, etc., and other states (e.g., Indiana) only allow an acquirer to exercise voting rights following approval from uninterested shareholders. Although as of date, no state has regulations directly mandating a tender offer rule, if a stock transfer only benefits certain shareholders, the director that approved such transaction may be deemed to have breached his/her fiduciary duties. Therefore, it is common practice to carry out an acquisition through a tender offer to all shareholders, providing each shareholder with equal opportunity to sell his/her shares at an appropriate price.
In Korea, the Securities and Exchange Act was amended in January 1997 to require any person who intends to acquire more than 25% of the total number of issued shares of a listed company to make a tender offer for at least 50% +1 issued and outstanding shares. When making a tender offer, the relevant offer price had to be either (i) the highest price at which the acquirer purchased the shares subject to the tender offer during the past year starting from the date of submission of the tender offer statement or (ii) the market closing price of the date immediately preceding the date of submission of the tender offer statement, whichever is higher. However, in February 1998, this scheme was abolished within a year from its implementation, due to concerns that it could cause delays in M&A transactions and restructuring deals during the Korea IMF Financial Crisis.
3. Proposed Mandatory Bid Rule as Announced by the FSC
The proposed mandatory bid rule as announced by the FSC in December 2022 includes the following requirements and scope, taking into account both the advantages (e.g., protecting minority shareholders) and disadvantages (e.g., hindering the expansion of the M&A market) of the mandatory bid rule.
Category
Details
Applicable Companies
• Listed companies under the Capital Markets Act
Requirements
• When an acquirer becomes the “largest shareholder,” with 25% or more of the total shares (e.g., when a shareholder newly becomes the largest shareholder with 25% or more of shares through an M&A, or when a shareholder with less than 25% of shares prior to the transaction acquires additional shares to become the largest shareholder with 25% or more of shares), a tender offer should be made to the remaining shareholders
Offer Price
• The same price paid to the controlling shareholder (including control premium)
Purchase Quantity
• Obligation to purchase at least 50% +1 shares (including control shares)
• If the proportion of shares accepting the public bid (i) exceeds 50% of total shares, the purchase of such shares shall be made on a pro-rata basis, and (ii) if it is less than 50% of the total shares, the requirement shall be deemed to be fulfilled if the purchase is made only on the quantity of shares subscribed for the public bid
Exception
• Share acquisitions based on the need for industrial rationalization (e.g., corporate restructuring), or the acquisition of shares pursuant to the need to comply with other laws and regulations
- The exceptions will be specified in the process of amending subordinate regulations, including the Enforcement Decree, following the amendment of the Capital Markets Act
Penalty
• Restriction on voting rights, disposition order, administrative action, and/or possible criminal punishment in case of violation
Enforcement Date
• After the enactment of the proposed amendment to the Capital Markets Act, a grace period of at least one year shall be granted
The FSC plans to amend the Capital Markets Act in 2023 based on the proposal detailed above. As the details may change during the legislative process (e.g., the bill-drafting stage, discussion and resolution stage at the national assembly, etc.), it would be beneficial to fully understand the direction and details of the new regulation.
In particular, considering the present market conditions, where new transaction structures (e.g., combination of existing and new shares, use of equity-linked securities and/or SPCs) are continuously being developed and used in addition to the traditional acquisition of existing shares to secure management control, it is essential to understand the specific requirements and scope of the mandatory bid rule to be introduced (e.g., the scope of exceptions to the mandatory tender offer, applicability of M&As via acquisition of new shares, method of calculating the tender offer price in case of a stock price increase after the disclosure of the execution of a control equity agreement, and applicability of indirect acquisitions through SPCs).
In addition, under the current Capital Markets Act regulations, a tender offeror is subject to certain restrictions, such as being required to submit documents evidencing that the tender offeror’s balance of deposits at financial institutions exceeds the amount required to complete the purchase (Article 146 (4) of the Enforcement Decree of the Capital Markets Act). In light of the above, the current tender offer system may be improved and strengthened once the contemplated mandatory tender offer is introduced.