'Guaranteeing Common Shareholders' Opportunity to Sell Shares in Listed Company M&A'... Financial Services Commission Announces "Mandatory Tender Offer System Introduction"

Introduction of Tender Offer System Proposed to Strengthen Shareholder Rights Protection During Management Control Change by Stock Transfer

[Asia Economy Reporter Minji Lee] The Financial Services Commission (FSC) is introducing a "mandatory tender offer system" to enhance the rights of common shareholders during changes in management control.

On the 21st, the FSC announced at a seminar held at the Korea Exchange on "Protection Measures for General Investors during Management Control Changes through Stock Transfer" that it will promote a mandatory tender offer system allowing common shareholders of the acquired company to sell their shares to the acquirer at a price reflecting the control premium. In most domestic M&A (mergers and acquisitions), the stock transfer method is used, but there have been ongoing concerns about the lack of adequate protection measures for general investors during this process.

The mandatory tender offer system requires acquiring a certain percentage or more of shares through a public tender offer when obtaining control of a listed company. This system protects the rights of general investors by guaranteeing common shareholders who do not agree with the change in controlling shareholders during M&A the opportunity to sell their shares to the new controlling shareholder.

Under Korean commercial law, various shareholder protection measures such as shareholder meeting resolutions and appraisal rights are stipulated for mergers and business transfers, but in the case of stock transfer methods, shareholder protection measures are insufficient despite the transfer of management control. Common shareholders have no opportunity to recover funds and cannot share in the control premium with controlling shareholders. At the seminar, Changhwan Lee, CEO of Align Partners, stated, "The control premium can be considered the property of the corporation," and argued that "according to the principle of shareholder equality, both controlling and common shareholders should be given the opportunity to sell at the same price during changes in management control."

Looking at overseas cases, the EU and Japan protect the rights of general investors through mandatory tender offer systems. The United States also protects common shareholders' rights by strengthening the role of the board of directors and through a developed civil litigation system.

However, measures are also needed to prevent the weakening of the positive functions of M&A that create synergies between companies. Younghoon Song, Executive Director of the Korea Exchange, emphasized, "To achieve the goal of protecting general investors while preventing the contraction of a normal M&A market, it is necessary to introduce a system suited to Korea’s circumstances rather than simply adopting overseas systems."

The FSC plans to pursue amendments to the Capital Markets Act next year, followed by a one-year grace period after the passage of the amendment. The FSC stated, "We will supervise to ensure this system is well established early in the market and impose appropriate sanctions for violations," adding, "If management control is acquired without a tender offer for the remaining shares of common shareholders, voting rights restrictions and share disposal orders will be imposed." Sooyoung Kim, Vice Chairman of the FSC, said, "With this announcement, we have effectively disclosed all the series of tasks for protecting general investors proposed by the new government," and added, "We will prepare to institutionalize legislative tasks promptly within next year."

This content was produced with the assistance of AI translation services.