Commercial Act Revision Makes Spin-Offs and Mergers More Difficult... Celltrion Case Draws Attention [Invest&Law]

There is analysis suggesting that the revision of the Commercial Act, which explicitly states the "duty of loyalty of directors to shareholders," will make corporate spin-offs and mergers more difficult. This is because there have been frequent criticisms in the past regarding "discrimination against minority shareholders" in the methods of spin-offs, mergers, and stock allocation ratios. Going forward, management seeking to enhance corporate competitiveness through spin-offs and mergers will need to ensure procedural legitimacy and communicate with shareholders. In this context, last year's cases involving Celltrion and Celltrion Pharm have drawn attention.

This revision of the Commercial Act expands the duty of loyalty of directors from being owed solely to the "company" to both the "company and shareholders." It also stipulates that, in the performance of their duties, directors must protect the interests of "all shareholders" and treat the interests of "all shareholders" equitably.

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While cases in which "owners (controlling shareholders)" made decisions at their own discretion without considering minority shareholders are expected to decrease, there are also growing concerns that even decisions aimed at enhancing a company's mid- to long-term competitiveness could be exposed to litigation risks. As a result, the business community is arguing that the Commercial Act should explicitly state the "business judgment rule," which exempts directors from liability if they have fulfilled their duty of care as a good manager (the duty of care under civil law) and made the best possible decision based on the information available to them.

In the United States, which is considered business-friendly, the business judgment rule is applied to matters such as spin-offs and mergers, exempting directors from liability. In fact, in Delaware courts?which set the standard for the U.S. corporate law system?the "Kahn v. M&F Worldwide Corp." case (hereafter referred to as the MFW case) established that the business judgment rule applies when there is both an "independent committee decision" and "majority approval from minority shareholders."

In 2011, M&F Holdings made a public proposal to forcibly purchase (squeeze-out) the shares held by minority shareholders of its subsidiary MFW, specifying two conditions: "approval by a special committee composed of independent directors" and "majority consent from minority shareholders." After the special committee fulfilled its duty of care and approved the squeeze-out proposal, the transaction proceeded at the end of 2011 with majority consent from minority shareholders. In 2012, Kahn and other minority shareholders filed a lawsuit, questioning the independence of the special committee members, but in 2014, the Delaware court ruled against the minority shareholders, stating that the "business judgment rule" applied. The court recognized the business judgment of the company's board of directors.

Last year, the case of the merger between Celltrion and Celltrion Pharm within the Celltrion Group appears to have been conducted with reference to the MFW case. Previously, Celltrion Group completed the merger between Celltrion and Celltrion Healthcare (Phase 1) at the end of 2023, and last year pursued the merger between Celltrion and Celltrion Pharm (Phase 2).

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First, similar to one of the two key conditions of the MFW case?the establishment of an independent committee?both companies set up "special committees" composed entirely of outside directors. To fulfill their duty of care, the special committees commissioned external accounting firms to evaluate the value of the merger and global consulting firms to analyze potential synergies, conducting a comprehensive review.

The other key condition of the MFW case?"minority shareholder approval"?was also implemented through surveys at both companies. The survey, conducted from July 31 to August 12 last year, saw participation from shares representing about 50% of the total issued shares. Among Celltrion Pharm shareholders, 67.7% were in favor, while only 8.7% of Celltrion shareholders approved.

After comprehensively reviewing the shareholder survey results, the necessity of the merger, and shareholder interests, the special committees of both companies concluded that "at this time, not proceeding with the merger is appropriate to protect the interests of the company and its shareholders." Subsequently, the boards of directors officially resolved not to proceed with the merger. The company stated, "We will reconsider the merger at a future point when the majority of shareholders of both companies agree and when the enhancement of shareholder value becomes certain."

Lee Kyungyeon, an analyst at Daishin Securities, commented, "It is an exceptional case in Korea for a company to directly gather shareholder opinions before making a major merger decision," adding, "It is positive in that it has increased trust among shareholders and stakeholders."

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