On May 8, 2023, the Financial Services Commission (“FSC”) announced a set of measures aimed at facilitating corporate merger and acquisition activities (the “Measure to Facilitate”) (Link). This Measure to Facilitate comprehensively reflects the discussions held at the meeting of the experts hosted by the FSC on March 10, the policy seminar that took place on March 27, and the Financial Development Council’s Capital Division Meeting held on April 6, 2023. The FSC also announced the following detailed tasks for implementing the Measure to Facilitate:
 

Among the above measures to facilitate, the key legally meaningful issues are as follows: 

1.   Decrease the burden of securing funds before tender offer
 

In this regard, as previously informed in our newsletter dated April 3, 2023 (Link), the FSCMA requires tender offerors to provide a deposit balance with financial institutions or other documents, evidencing their funds in excess of the amount required for tender offer as part of the tender offer statement. However, the authorities had previously recognized only evidence of “holding” of funds, such as deposit balance, as evidence for securing funds, but not loan commitments or other similar documents, which have been a burden for tender offerors who had to deposit the anticipated funds in advance of the actual tender offer. The financial regulators have now improved the system to include loan commitments from underwriters and LP’s commitment to investment, as evidence for the procurement of funds for the tender offer, alleviating the financial burden of advance deposit. This new system became effective on April 1, 2023.
 

2.   Simplify conversion process of CB, etc., upon spin-off/spin-off merger
 

In the event of a spin-off or spin-off merger, in addition to the existing shares, convertible bonds, bonds with warrants, and securities with warrants must be converted into the securities of the newly established entity, or the spun-off merger counterparty. Currently however, the electronic registry lacks a legal basis to process investor information, and therefore the company must obtain investor information directly from securities firms, and handle the manual conversion of relevant securities, all very time-consuming and costly.

Accordingly, the FSC plans to amend the Electronic Securities Act to provide a legal basis for electronic registries to process investor information collectively for convertible bonds, bonds with warrants, and securities with warrants (such as ordinary shares), in cases of spin-off and spin-off and merger.
 

3.   Recognize reasonable exceptions to mandatory tender offer, and allow deferment of mandatory tender offer in case of merger filing
 

As explained in our newsletter dated December 22, 2022 newsletter (Link), the FSC is currently seeking to introduce a mandatory tender offer rule. If a mandatory tender offer is conducted in a situation where the outcome of the merger review following an M&A is uncertain, there may be significant drawbacks, including an order to dispose of shares in case of a non-clearance decision. To alleviate this burden on tender offerors, the FSC intends to allow tender offeror to delay the mandatory tender offer until after they receive notification of review results on post-closing merger reporting, provided that they have undergone a preliminary review by the Korea Fair Trade Commission. 

In addition, the FSC is considering exempting companies from mandatory tender offer, if it is deemed necessary for policy purposes, such as purchase pursuant to laws and regulations for the rationalization of corporate management or government permits, licenses or approvals, or acquisition of shares disposed of by creditor financial institutions in connection with corporate restructuring.
 

4.   Strengthen merger disclosure and establish conduct rules of external valuation agencies
 

• Strengthen merger disclosure: In order to ensure a more transparent disclosure of the merger process and the details of review by the board of directors, the FSC will specify the items to be disclosed in the key items report and the securities registration statement, including the board of directors’ opinion on the background of the merger, feasibility of the merger, and adequacy of the merger ratio.

• Establish conduct rules toward external valuation agencies: In case of mergers between listed and unlisted companies, an external valuation by a qualified third party (e.g., accounting firms, credit rating agencies, financial investment servicers) is mandatory to assess the fairness of the merger price. However, problems have arisen due to the absence of conduct rules ensuring objectivity and reliability. For instance, some institutions engaged in conflicts of interest, by evaluating the valuation agency’s merger price calculation by themselves, or by providing an external valuation opinion considering the client’s interests, and others offered a favorable opinion merely to comply with the law. Accordingly, specific conduct rules will be established so that a third party with independence and expertise can faithfully review the appropriateness of the merger price. For example:

5.   Enhance flexibility in calculating merger price
 

The current FSCMA obliges listed companies to calculate merger prices based on stock prices in order to increase predictability. However, it has been pointed out that rigid calculation methods under laws make it difficult to reflect the true corporate value, undermine the autonomy of the market, and restrict the determination of merger prices through free negotiation between the parties to the merger, thereby dampening M&A transactions. 

As such, when non-affiliates engage in a merger transaction on equal terms, the FSC will allow the parties to freely choose the method for calculating the merger price. However, the parties must obtain a third-party external valuation to ensure the fairness of the price calculation. The FSC aims to balance flexibility in calculating merger prices with public disclosure expansion and strengthened external valuation regulations to ensure an accurate assessment of appropriate prices and prevent arbitrary calculations. This system applies solely to non-affiliate mergers for at least one year to prevent any attempts to evade regulations by disguising mergers.

In the case of a merger between affiliates, where there is a concern that general shareholders may suffer damage due to decision-making centered on major shareholders, the FSC will conduct a mid- to long-term review based on the market impact of the freedom to choose method of calculating the merger price between non-affiliates.
 

6.   Rationalize backdoor listing system
 

In case of a merger between a listed company and an unlisted company, the review criteria for backdoor listing will be rationalized as follows:
 

• Including simplified mergers as those subject to backdoor listing review: In the case of the KOSDAQ market, simplified mergers are not subject to the backdoor listing review (i) with the consent of all shareholders of the non-surviving entity, or (ii) where the surviving entity owns 90% or more of the shares of the non-surviving entity. However, as it has been pointed out that unlisted companies controlled by a small number of shareholders, which are subject to the backdoor listing review, are classified as simplified mergers with “consent from all shareholders” and thus easily avoid the backdoor listing review. As such, the KOSDAQ market will also have simplified mergers go through the backdoor listing review.

• Considering the corporate value when determining backdoor listing: In case of a merger between an unlisted company with small assets, capital, and sales but high future growth potential and a listed company, it is necessary to regulate backdoor listing given the actual value of shares. Accordingly, if the stock value of an unlisted company is greater than that of a listed company, it will be subject to backdoor listing review.
   

If the above support measures are implemented, they are expected to significantly impact M&A transactions in practice, such as acquisitions of shares and mergers of listed companies. In particular, the enhanced public disclosure requirements for mergers, conduct rules for external valuation agencies, and increased flexibility in determining the merger price calculation method will altogether facilitate US-style M&A’s, such as mergers with target companies immediately after calculating the merger price reflecting control premium. Moreover, flexible M&A transactions tailored to the parties’ circumstances and needs can be actively considered by comparing mergers with consideration in shares and mandatory tender offers with consideration in cash. The deferral of the timing of the mandatory tender offer is also meaningful because financial regulators recognize and address concerns regarding the merger timetable’s harmony, which has hindered the use of tender offers as an M&A tool in the past.

[Korean Version]