As mentioned in our previous newsletter (Link), on May 8, 2023, the Financial Services Commission (the “FSC”) announced its “Corporate M&A Support Plan,” stating that the FSC is reviewing measures to improve systems related to mergers and acquisitions (“M&As”), including mergers of KRX listed companies. Following this announcement, the FSC held a meeting on February 6, 2024, to discuss improvements to M&A regulatory systems, and announced detailed measures to boost regulatory consistency with global standards, aimed at strengthening protection for investors (Link).
 
At the meeting, the FSC Vice Chairman’s opening remarks noted that although M&As are important mechanisms to promote growth and innovation in a company, there are a number of issues under the relevant systems, including the fact that general shareholders are not provided with sufficient information on (i) the reasons for undertaking M&As and their processes, and (ii) the decision-making process by the board of directors (“BOD”), which is at the core of the corporate governance structure. Moreover, the current M&A regulations are too rigid to accommodate the restructuring demands of companies in a more autonomous way, as illustrated by the uniform application of merger price calculation methods even in mergers between non-affiliated companies for example.

To address these issues, the FSC announced detailed plans at the meeting to implement measures to enhance consistency with global standards of the M&A systems to protect investors. The key contents are as outlined below.
 

• The current regulations apply uniform rules on how to calculate merger prices, based on market prices (base stock prices) for listed companies, and intrinsic values et al., for private companies, thereby undermining M&A transactions that are based on voluntary negotiations between parties on an equal footing. To address this issue, the authorities will no longer mandate the method of calculating merger prices under the Financial Investment Services and Capital Markets Act (the “FSCMA”); instead, the parties will be permitted to determine their merger prices through negotiations. In the case of mergers between affiliates, the current regulations will be maintained due to concerns about potential harm to general shareholders resulting from decision-making centered on the majority shareholder, and reviews to improve regulations will be conducted mid-to long-term.
   

• Strengthen disclosure requirements for the merger process: The standards for preparing the disclosure form will be amended to provide sufficient background on the merger, to mandatorily disclose (i) the background for pursuing the merger, (ii) the reason for selecting the counterparty, and (iii) the rationale for key decision-making, including the reason for determining the timing of the merger.
   

• Mandate disclosure of a BOD’s written statement: There have been complaints about the difficulty for general shareholders to raise issues, especially when a decision is biased towards the controlling shareholder, due to the non-disclosure of the BOD’s discussions on the merger. The authorities intend to impose on the BOD the obligation of preparing and disclosing a written statement on the merger by amending the FSCMA and applicable laws. Such written statement will include the BOD’s opinions on the following: (i) the purpose and anticipated effects of the merger, (ii) the appropriateness of transaction terms, such as the merger price and merger ratio, and (iii) any dissenting directors and their reasons for objecting to the merger. If the BOD’s opinions are identical to other sections of the disclosure documents, such as the Registration Statement, the companies may provide a summary statement by specifying those sections and confirming that there is no disagreement.
   

• Set up the regulations to govern the conduct of third-party evaluation agencies: The current regulations do not prohibit a third-party agency that calculated the merger prices from also acting as an evaluation agency. This may lead to a potential conflict of interest and the possibility of passive opinions being presented. The authorities will (i) prohibit the selection of an agency that was involved in the advisory services for the calculation of merger prices as a third-party evaluation agency, and (ii) clarify the definition of “appropriateness” of the merger prices as the “result of evaluating the company’s actual value,” and not as the “verification of compliance with the statutory valuation method.” They will also revise the regulations related to third-party evaluation reports to ensure that the “appropriateness of the company’s value” is evaluated. In addition, (iii) third-party evaluation agencies will be obligated to establish their own quality management regulations. After performing the evaluation, they will be required to state whether they have complied with these regulations.
   

• Require obtaining of consent (or resolution) from the statutory auditor (or the audit committee) when appointing a third-party evaluation agency in a merger between affiliates: There is a concern that an external third-party evaluation may be biased towards the controlling shareholder’s interests in the event of a merger between affiliates. From now on, a third-party evaluation agency for a merger between affiliates will be appointed with the consent or resolution from the statutory auditor or audit committee, which must be independent from the controlling shareholder. That said, it is anticipated that the disclosure form will be amended to ensure that the audit committee’s resolution to appoint a third-party evaluation agency is disclosed after the merger decision is made public. This is to prevent potential misuse of such information for unfair trade practices, among other concerns.
   

Once the foregoing regulatory amendments are introduced, significant changes may occur in the practices related to restructuring, including mergers, demergers, and business transfers involving listed companies. Furthermore, the obligations and responsibilities of the management, such as the BOD and the audit committee, will be emphasized. Additionally, the procedures and content for disclosure will be strengthened. Therefore, companies are advised to take note of these changes. In mergers between non-affiliates, the calculation of the merger price based on stock price will not be mandated, thereby recognizing the parties’ voluntary negotiations and agreement, but the risk of liabilities and disputes may increase. In addition, it is also advisable to take into consideration changes to M&A systems, including the mandatory tender offer rule, which the FSC has already announced and for which the bill has been submitted to the National Assembly (Link).

[Korean Version]