[Square] Corporate Value Evaluation, Fairness Is Life

Kim Kwangjoong, Attorney at Law, Hangyeol Law Firm

The Yoon Suk-yeol administration, which succeeded in taking power with "fairness" as its key theme, has also announced several pledges to protect individual investors in the capital market, raising high expectations for securing fairness in the capital market. However, it is regrettable that no measures have been proposed to address the issue of distortion in corporate value evaluation, which is one of the major causes undermining fairness in our capital market. As our capital market grows and becomes more sophisticated, the demand for corporate value evaluation has exploded, and its importance is increasing. The greater the distortion in value evaluation, the greater the damage to investors. However, supervision to prevent this is not being properly conducted.

It is not difficult to distort the value when evaluating corporate value by artificially lowering or raising it. For example, if a company's past performance is poor and one wants to lower its value, one can apply methods under the Inheritance and Gift Tax Act (상속세및증여세법, Sangsoekse mit Jeuyeosebeop) based on past profits and losses. Conversely, if one wants to raise the value, one can apply evaluation methods such as the Discounted Cash Flow (DCF) method by positively estimating future financial figures. Companies can also distort value by adjusting the materials provided to accountants. Distorted evaluations may conceal embezzlement or breach of trust by major shareholders or management and may be used as a means of fraud against investors. In particular, in mergers between listed companies and unlisted companies with large major shareholder stakes, distorting the valuation of unlisted companies causes harm to many individual investors. Similar controversies have been raised recently in the mergers of Dongwon Industries, and in the past, Samsung C&T, Samkwang Glass, and Hyundai Engineering.

Let us look at a case currently undergoing criminal trial. A and B agreed to trade shares of company C, and the value was evaluated by accounting firm D. A requested the valuation from D and paid a large fee, also promising to entrust D with due diligence, advisory, and other services related to mergers and acquisitions that A would conduct later. When A requested D to conduct the valuation in a way favorable to A, anticipating a high possibility of litigation, D agreed. Subsequently, A and D exchanged draft evaluation reports several times and negotiated. When A suggested revisions, D complied. Finally, D requested A’s "confirmation" on the evaluation content before preparing the report. A also promised to cover any legal costs if civil or criminal issues arose related to D’s valuation. Although this is a legal dispute, it raises doubts about whether such a process for valuation, which should be fair, is justifiable and whether our society should continue to tolerate it.

Despite repeated attempts to distort corporate value, supervision remains inadequate. The Financial Services Commission and the Financial Supervisory Service announced in 2008 that they would establish sanction standards for poor evaluations and strengthen supervision. However, the relevant regulation remains only Article 165-4 of the Capital Market Act. Even that only restricts evaluation work for a certain period when an external evaluation agency’s assessment is significantly deficient, rendering sanctions ineffective. Moreover, this regulation applies only to listed companies, so there is no supervisory system for valuation of unlisted companies.

To secure fairness in the capital market, the problem of distorted corporate value evaluation can no longer be neglected. A system capable of properly supervising this must also be established. As the new government has taken office with "fairness" as its theme, it is hoped that the corporate value evaluation supervisory system will be significantly improved and that the capital market will become fairer under the new administration.

Kwangjoong Kim, Attorney at Law, Hangyeol Law Firm

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