Autonomy Emerging Over Market Price in Corporate Mergers... Need for Safeguards

Multiple External Evaluation Agencies Calculate... Procedural Fairness Must Be Ensured
Post-Merger Decision Accountability and Protection of Minority Shareholders Needed
Duty of Loyalty of Directors and Introduction of MoM Required

An improvement plan is being promoted to abolish the standard market price, which is the method for calculating the merger price, and leave it to market autonomy. However, experts believe that if it is left to market autonomy, multiple external evaluation agencies should assess the corporate value, and supplementary measures are needed to secure procedural legitimacy. They also raised their voices that, since there is a concern that external evaluation agencies might calculate corporate value in favor of the company or controlling shareholders, the duty of loyalty of directors and the Majority of Minority (MoM) resolution for minority shareholders should be introduced in the merger and acquisition (M&A) process to protect shareholders' interests.

According to the government on the 31st, the Financial Services Commission and the Ministry of Justice recently held a bureau-level working meeting to discuss improvement plans for the method of calculating the merger price. A government official said, "There is a consensus that additional measures are needed to resolve problems arising in the merger process, such as split listings," adding, "Lawmakers from the opposition party, including Kim Hyun-jung of the Democratic Party of Korea, have actively proposed related laws, so the government’s position is also necessary."

Earlier, on the 12th, Kim Byung-hwan, chairman of the Financial Services Commission, stated, "There have been continuous questions about whether it is appropriate to use the current standard price as the method for calculating the merger price," and added, "Since there are limitations in reflecting the actual value by calculating with a uniform formula, we will prepare improvement plans by comprehensively considering international standards and changes in market conditions." This is interpreted as a sign that the government intends to seriously review the method of calculating the merger price following growing shareholder dissatisfaction, such as in the recent Doosan case.

The financial authorities announced an improvement plan in February to allow parties to autonomously determine the value and receive external evaluations for mergers between non-affiliated companies. Since then, as criticisms have continued that the merger ratios between affiliates during Doosan Group’s business restructuring infringe on minority shareholders’ rights, the authorities are considering applying this plan to mergers between affiliates as well.

However, experts say that if the merger price is left to market autonomy instead of the standard market price, supplementary measures are necessary. If a method is introduced where external evaluation agencies such as accounting firms assess corporate value, as in mergers between non-affiliated companies, there is concern about collusion between companies and accounting firms. A financial investment industry official pointed out, "Since the client is the company anyway, accounting firms cannot help but reflect the company’s position, which may result in prices being set in a way favorable to the company or controlling shareholders."

Some argue that to prevent such adverse effects, entities such as the government or courts, rather than companies, should intervene to select evaluation agencies or use multiple evaluation agencies to assess corporate value. Baek Jae-wook, CEO of the Daeshin Economic Research Institute, said, "Using multiple evaluation agencies to calculate the appropriate corporate value may be better than mechanically applying the standard market price," adding, "However, like in an initial public offering (IPO), it is necessary to provide information that investors can accept and go through a procedure that can persuade them, such as the valuation derivation method applied."

Even if courts or the government select external evaluation agencies, there are opinions that it is difficult to guarantee objectivity since the evaluators are ultimately accounting firms. Considering the fierce competition among accounting firms to win contracts, the structure inevitably leads to catering to large corporations. Taking this ecosystem into account, opinions have been raised that the duty of loyalty of directors and the Majority of Minority resolution should be established as supplementary measures.

Professor Lee Chang-min of Hanyang University said, "Mergers are an area where conflicts among shareholders are intense, so procedural legitimacy that can resolve shareholder issues is important," adding, "To supplement this, the duty of loyalty of directors under the Commercial Act and the Majority of Minority resolution should be introduced, and whether these have been fulfilled should be included as an exemption clause." The MoM principle is a procedure to obtain the consent of the majority of minority shareholders.

There were also opinions that disclosure should be strengthened and the fairness of the merger ratio should be evaluated by the market. Hwang Hyun-young, a researcher at the Korea Capital Market Institute, advised, "The purpose of the merger, the merger ratio, and the basis for calculation should be disclosed," and added, "Measures to ensure the fairness of mergers that may harm shareholders’ interests should also be prepared." Specific measures proposed include the introduction of the right to request merger attraction, the merger inspector system, and recognition of liability for damages by merger-related parties.

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