As covered in our previous newsletter dated May 9, 2023 (Link), the Financial Services Commission (the “FSC”) unveiled a set of policies on May 8, 2023 dubbed the “Corporate M&A Support Plan” (the “Support Plan”) with the aim to improve the M&A regulatory system with respect to listed companies by increasing fairness of M&A transactions and procedures including mergers, business transfers, spin-offs and spin-off mergers. Following this announcement, the FSC held a meeting on February 6, 2024 to further discuss improvements to M&A regulations (Link). In furtherance of the Support Plan and subsequent discussion, the FSC issued a legislative notice on March 5, 2024 on proposed amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”) and the Regulation on Issuance and Disclosure of Securities (the “RIDS”) (Link).

Accordingly, the proposed amendment to the Enforcement Decree of the FSCMA (Link) was approved at the meeting of the State Council on November 19, 2024, and the amended Enforcement Decree of the FSCMA and amended RIDS were subsequently promulgated and became effective one week later, on November 26, 2024. The amendments contain provisions intended to (i) relax regulations on calculating merger prices between non-affiliates, (ii) strengthen merger disclosures, and (iii) improve the external valuation system. The details of the amendments are as follows:
 

• The previous version of the Enforcement Decree of the FSCMA (i.e., prior to amendment) applied uniform rules on how to calculate merger prices in the restructuring of listed companies, such as by way of merger. More specifically, merger prices (which serve as the basis for merger ratios) for listed companies were required to be calculated by applying a statutory formula based on market prices (i.e., base stock prices) and could only be decreased or increased by up to a certain percentage (i.e., ±10% between affiliates, and ±30% between non-affiliates). Critics argued that such calculation method hindered structural improvements which could be achieved through arm’s-length bargaining between parties on equal footing.
   

• In order to address this issue and increase global integrity of the M&A regulatory system, the amended Enforcement Decree of the FSCMA excludes mergers between non-affiliates from the scope of application of the regulations that govern the calculation of merger prices (Article 176-5 (1) of the amended Enforcement Decree of the FSCMA). This change has been adopted with reference to cases in the US, Japan, and other major countries in Europe that require the feasibility of mergers to be secured through disclosures and external valuations, in lieu of directly regulating merger prices (Article 176-5 (7) of the amended Enforcement Decree of the FSCMA).
   

• Under the previous versions of the Enforcement Decree of the FSCMA and the RIDS, obtaining an external valuation was mandatory for mergers between a listed company and an unlisted company. However, critics had noted that the lack of regulations governing the conduct of external valuers made it difficult to ensure the fairness and credibility of external valuations.
   

• Under the amended Enforcement Decree of the FSCMA and the amended RIDS, external valuations are mandatory for mergers between non-affiliates that are exempt from the regulations governing the calculation of merger prices. As for mergers between affiliates, the consent of the statutory auditor of the listed company (or a resolution of the audit committee, if any) is required with respect to the selection of an external valuer (Article 176-5 (7) and (9) of the amended Enforcement Decree of the FSCMA).
   

• The amended Enforcement Decree of the FSCMA and the amended RIDS also require external valuers to establish quality control standards with which they must comply when performing valuation services in connection with mergers, and to disclose the results of quality inspections. In addition, an external valuer may not act as external valuer for a merger in which it was involved in the calculation of the merger price (Article 176-5 (10) through (12) of the amended Enforcement Decree of the FSCMA; Article 5-14 of the amended RIDS).
   

• The quality control standards must specify matters relating to the maintenance of independence, objectivity, and fairness in the course of performing services in connection with mergers, as well as the obligation to review and prevent potential conflicts of interest (Article 5-14-4 of the amended RIDS).
   

• The amended Enforcement Decree of the FSCMA and the amended RIDS require that the board of directors of the listed company prepare and disclose a written statement which sets forth (i) its opinion on the purpose and anticipated effects of the merger, (ii) its opinion on the fairness of transaction terms such as the merger price and merger ratio, and (iii) any dissenting directors’ reasons for objecting to the merger (Article 176-5 (6) of the amended Enforcement Decree of the FSCMA; and Articles 2-9 and 4-5 of the amended RIDS).
   

The promulgation of the amended Enforcement Decree of the FSCMA and the amended RIDS is expected to result in significant changes to practices related to (i) structuring of, and negotiations of transaction terms with respect to, mergers, spin-offs, spin-off mergers, comprehensive share swaps and transfers, and business transfers of listed companies, and (ii) the execution and performance of agreements for such transactions.
 
Further, considering that non-affiliated parties in restructuring transactions such as mergers will have more discretion with respect to determining the merger ratio, minority shareholders and other stakeholders may raise issues regarding the fairness of the terms of those transactions, at the general meeting of shareholders or in the course of implementation of such transactions. Therefore, it will be important to ensure (i) fairness in the selection of an external valuer and in its valuation process, and (ii) the integrity of the resolution of the board of directors and its written statement, which will be subject to the disclosure requirements explained above.

[Korean Version]