1.

Improvement of Regulation on Calculation of Merger Ratio, Etc., in Restructuring Transactions Such As Mergers
 

• There has been criticism over the current method of calculating the merger ratio, etc., in mergers, spin-off mergers, comprehensive share swaps and transfers, among others, that it hinders structural improvements that can be achieved through autonomous bargaining between equal parties. It is due to the fact that listed companies are uniformly regulated to calculate enterprise value following a statutory formula based on market prices (i.e., base stock prices).

• With strengthened disclosures on mergers, etc., and mandatory external evaluations in place, the proposed amendments to the Enforcement Decree of the FSCMA will allow companies to calculate merger ratios, etc., in mergers between non-affiliated companies through an autonomous evaluation instead of on the basis of stock prices (Article 176-5, Paragraph 1 (amended) of the Proposed Amendment to the Enforcement Decree of the FSCMA). However, in the case of mergers between affiliates or mergers of special purpose acquisition companies (“SPACs”), the existing method of calculating merger ratios, etc., under the FSCMA and its Enforcement Decree will continue to apply unchanged even after the above amendment.
   

2.

Mandatory Preparation and Disclosure of Board of Directors’ Written Statement
 

• There has been no system for disclosing the details of merger-related discussions by the board of directors under the Enforcement Decree of the FSCMA and the Regulation currently in effect. To address this issue, the proposed amendments to the Enforcement Decree of the FSCMA and the Regulation will require preparation and disclosure of board of directors’ written statements as a mandatory item.

• Specifically, the proposed amendment to the Enforcement Decree of the FSCMA requires the board of directors, when adopting a resolution for a merger of listed companies, to prepare a written statement on (i) the purpose of merger and its anticipated effect, (ii) the appropriateness of the merger price, (iii) the appropriateness of transaction terms, such as the merger ratio, (iv) reasons for objection to the merger by any of the directors (if any), and (v) other matters prescribed and publicly notified by the FSC, and to have such written statement signed by all directors (Article 176-5, Paragraph 15 (newly added) of the Proposed Amendment to the Enforcement Decree of the FSCMA).

• The proposed amendment to the Regulation obligates disclosure of the board of directors’ written statement by stipulating such written statement as a required attachment to the report on material facts and the securities registration statement that need to be disclosed under the FSCMA in the case of mergers of listed companies (Article 2-9, Item 14 and Article 4-5, Item 7 (newly added) of the Proposed Amendment to the Regulation).
   

3.

Improvement of External Evaluation System
 

• Under the Enforcement Decree of the FSCMA and the Regulation currently in effect, obtaining an external evaluation is mandatory for mergers between a listed company and an unlisted company. However, it has been pointed out that the lacking regulation on the conduct of external evaluation agencies makes it difficult to ensure the fairness or credibility of external evaluations.

• Accordingly, the proposed amendments to the Enforcement Decree of the FSCMA and the Regulation (i) obligate external evaluation agencies to establish quality management standards that must be abided by when performing services related to mergers, and (ii) prohibit performing external evaluation services unless such quality management standards are in place. Specifically, the quality management standards must address (i) maintenance of autonomy, objectivity and fairness, (ii) review of potential conflicts of interest and duty to avoid conflicts of interest, (iii) matters concerning confidentiality, such as prohibition of use of non-public information, and (iv) measures to be taken against those who violate the quality management standards for external evaluation services (Article 176-5, Paragraph 8 (amended) and Paragraph 11, Item 1 (newly added) of the Proposed Amendment to the Enforcement Decree of the FSCMA; Article 5-14-4 (newly added) of the Proposed Amendment to the Regulation).

• Furthermore, when selecting an external evaluation agency for a merger between affiliated companies that involves a heightened concern over fairness, the proposed amendments aim to enhance the credibility and fairness of external evaluations by (i) requiring either a resolution of the audit committee or consent of the statutory auditor for such selection (Article 176-5, Paragraph 14 (newly added) of the Proposed Amendment to the Enforcement Decree of the FSCMA), and (ii) preventing the external evaluation agency involved in the calculation of the merger ratio, etc., from performing evaluation services (Article 5-14, Item 7 (newly added) of the Proposed Amendment to the Regulation).