English translation of the original Korean report. Images and source documents may contain Korean text.

“The opportunity to sell 100% of remaining shares must be guaranteed”…Urges amendment of the bill, citing the cases of Douzone Bizon and Aekyung Industrial.

It has been pointed out that the mandatory tender offer system, which guarantees general shareholders the opportunity to sell their shares when acquiring corporate management rights, may actually fail to protect minority shareholders.

There is a loophole that if an acquirer first buys shares from major shareholders, etc., and secures more than half of the total shares, the remaining general shareholders’ shares do not have to be subject to a tender offer.

According to the Korea Corporate Governance Forum (Chairman Lee Nam-woo) on the 5th, the forum recently urged an amendment to the Capital Markets Act revision bill, which has been postponed for plenary session processing in the National Assembly, through a commentary. The revision bill stipulates that if a person acquires 25% or more of a listed company’s shares to become the largest shareholder, they must secure 50% + 1 share or more of the issued shares.

The forum argued that since the current bill virtually allows transactions where only major shareholders receive a management premium and sell their shares, it fails to fulfill its original purpose of protecting general shareholders.

As a specific example, the forum presented a situation where an acquirer first acquires 40% of controlling shareholders’ stakes, 8% of friendly shareholders’ stakes, and 3% of institutional investors’ stakes over-the-counter. In this case, since the acquirer has already secured 51% of the total shares, it explained that there might be no additional tender offer obligation for the remaining 49% held by general shareholders.

The forum emphasized that all remaining shares should be subject to a tender offer to provide all general shareholders with the opportunity to sell their shares at the same price as major shareholders.

■ Douzone Bizon: Full Tender Offer…Aekyung Industrial: Case of Stock Price Decline

The forum presented the acquisition of Douzone Bizon by Swedish investment firm EQT as an example of general shareholder protection. EQT signed a contract in November last year to acquire shares from Chairman Kim Yong-woo’s side, among others, at 120,000 won per share, and this year, it conducted a tender offer for general shareholders at the same price.

On the other hand, the forum pointed out that after the Taekwang Group consortium decided to acquire a 63% stake and management rights in Aekyung Industrial for 470 billion won in October last year, Aekyung Industrial’s stock price fell from 15,000 won to 10,610 won. The intention is that there can be a difference in selling opportunities and prices between major shareholders who transfer management rights and general shareholders who continue to hold shares.

It also presented cases of overseas corporate acquisitions. The forum emphasized that Samsung Electronics provided all shareholders with the opportunity to sell their shares at the same price when it acquired Harman International Industries in the U.S. for approximately $8 billion in 2016.

Furthermore, citing the case where U.S. private equity fund TPG acquired a 61% stake and control of Lotte Rental and also pursued a tender offer for the remaining shares, the forum refuted the argument that guaranteeing the opportunity to buy all shares would shrink the M&A market due to the burden of acquisition funds. However, concerns from the financial investment industry that the financial burden could increase during the corporate acquisition process have also been raised.

The forum also took issue with the name “mandatory tender offer system” itself. It argued that the practice of major shareholders monopolizing premiums by trading only a portion of shares that entail control should be viewed as a “Private Benefits of Control” transaction.

The forum expressed the view that the recent selling of domestic shares by foreign investors also reflects concerns about a retreat in capital market policy, and urged that all general shareholders should be guaranteed the opportunity to sell under the same conditions, similar to major countries like the UK and Germany.