FSC Announces Plans to Introduce Mandatory Tender Offer Rule

As we informed you previously, the presidential election pledges and the Transition Committee’s policyhandbook (Link) had referred to adopting measures for preventing damages suffered by minority shareholders as a result of major shareholders’ monopoly of management control premiums when selling their stake in a company. In this connection, the Financial Services Commission (“FSC”) had announced at its policy seminar for enhanced investor protection in the stock market on June 17, 2022 (Link) that it would implement regulatory improvements tailored to local needs by taking foreign regulations such as the mandatory tender offer rule into consideration.

On December 21, 2022, the FSC announced detailed plans to introduce a mandatory tender offer rule at its seminar on investor protection measures relating to change of control by way of share transfers. The key details are set forth below, which will be implemented through the amendment of the Financial Investment Services and Capital Markets Act (the “FSCMA”) next year. As the M&A process of companies listed on the KRX KOSPI/KOSDAQ Markets (“listed companies”) involves various types of transaction structures depending on factors such as the acquirer, target company, sale structure and price adjustments, it would be necessary to further review and discuss whether and how to apply the mandatory tender offer rule on a case-by-case basis. It may also be possible for the current tender offer system to be supplemented or enhanced over the course of implementing the new mandatory tender offer rule, including by amending the requirement to deposit funds in advance prior to commencing a tender offer. As these issues may result in important regulatory changes that fundamentally change the M&A transaction structure of listed companies, it would be necessary to pay close attention to the amendment process of the FSCMA going forward, from the proposal stage to the deliberation and voting of the amendment bill.

(A) Basic Direction

Although the introduction of the mandatory tender offer rule offers benefits such as protection of general investors, there also exist concerns about the contraction of the corporate M&A market as a result thereof. Taking this into consideration, the rule is designed in a way that minimizes the possibility of hindering normal M&A transactions that create synergy for the merging companies, while at the same time putting safeguards in place for the protection of ordinary shareholders.

(B) Detailed Plan

During the M&A process of a listed company, the mandatory tender offer rule aims to ensure adequate opportunity for ordinary shareholders of the acquired company to sell their shares to the acquirer at a price that reflects control premium.

(Companies in scope) Listed companies governed by the FSCMA.
(Requirements for application) When a person becomes the largest shareholder with a stake of 25% or more, the tender offer obligation will be imposed on such person vis-à-vis the remaining shareholders.
(Purchase price) The same price offered to the controlling shareholder (including control premium) will apply.
(Purchase volume) Obligation to purchase 50% + 1 share in total. Tender offer obligation is imposed with respect to a certain portion of the remaining shares after securing management control (50% + 1 share of the total shares minus shares acquired to achieve management control). If the shares responding to a tender offer: (i) exceed 50% of the total shares, the acquirer will purchase the shares in a proportionate distribution method, and (ii) fall short of 50% of the total shares, the acquirer’s purchase of the tendered shares will fulfill the obligation. (Example: 60% of the shares respond to the mandatory tender offer following the acquirer’s acquisition of 30% + 1 shares → it is permissible to acquire only 20% by proportionately dividing 60% into 1/3 (i.e., 50% + 1 share in total).
(Exceptions) Exceptions apply to certain cases such as where it is necessary for “rationalization of industry” (e.g., corporate restructuring) and where shares are acquired in compliance with obligations imposed under other laws, and will be addressed in detail when subordinate statutes (e.g., Enforcement Decree of the FSCMA (“Enforcement Decree”)) are amended following the amendment of the FSCMA.
(Sanctions) Restriction on voting rights, disposition order, administrative measures and criminal penalties can be imposed upon violation.
(Timing of enforcement) Given the significance of the adoption of this major change, a sufficient grace period of at least one year will be provided to market participants following the passing of the bill.

On December 20, 2022, the FSC also announced that the proposed amendments to the FSCMA and the Enforcement Decree described below were approved by the State Council. Please find further details below:

As a follow-up to the “Plans to Enhance Ordinary Shareholders’ Rights and Interests Relating to Listing of Split-Off Subsidiaries” announced by the financial authorities in September 2022, the Enforcement Decree was proposed to be amended to introduce dissent and appraisal rights in connection with split-offs of listed companies. These rights aim to protect ordinary shareholders’ rights and interests in conjunction with (i) enhanced public disclosure and (ii) strengthened listing reviews. After being passed by the State Council as stated above, the amended Enforcement Decree was promulgated and immediately went into force on December 27, 2022.

The following proposed amendment to the FSCMA has been passed by the State Council and will be submitted to the National Assembly:

a) Strengthening of the obligation to report the status of significant shareholding (i.e., 5% reporting). The maximum administrative fine for violation of the duty to report will be increased tenfold from 1/100,000 to 1/10,000 of the company’s market capitalization;
b) Listed companies issuing convertible bonds (CBs) or bonds with warrants (BWs) will be required to disclose such issuance by no later than one week before the payment date; and
c) Newly listed companies will be required to submit quarterly reports and semi-annual reports for the immediately preceding period. Also, the minimum administrative fine to be imposed on small listed companies for violating the disclosure requirement will be raised to KRW 1 billion.

With the announcements made at the above-mentioned seminar on December 21, 2022, the FSC has now touched on practically all of the policy tasks identified by the new administration for protection of general investors in the capital market. As for those policies that require legislative action, the FSC stated that it would set out to prepare for their prompt implementation within next year. In addition, the FSC also announced its plans to exert more efforts to protect the rights and interests of general investors by, for example, improving the system for acquisition and disposal of treasury shares. It would accordingly be prudent to also pay attention to regulations on the handling of treasury shares in corporate mergers and spin-offs, which may be amended in the long term.

[Korean Version]

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