S.Korea to introduce mandatory offer for takeover deals

South Korea is set to require a takeover bidder for a listed company to buy stakes held by small shareholders at the same price to be paid to a major stockholder in a bid to protect retail investors and increase capital inflows.

The Financial Services Commission (FSC), the country’s top financial regulator, on Wednesday said the government plans to introduce a mandatory offer rule that requires a bidder to buy some of the outstanding shares of a listed company in addition to purchases from a major shareholder for an acquisition deal.

When a bidder buys a stake of 25% or more in a company to become a major shareholder, it must raise the stake to at least 50% plus one share by purchasing not only stocks for the firm’s management right but also those held by small shareholders, according to the FSC. The bidder must buy stakes from small shareholders for the same price as that for the major stockholder.

If stakes held by small shareholders, who want the bidder to buy, exceed 50%, the volume of stocks to be purchased by the bidder will be proportionally allocated. If such stakes fall short of 50%, the buyer is regarded to have fulfilled its purchase obligation.

A bidder does not need to meet the rule when it buys a stake of more than 50% from a major shareholder or when a takeover deal is necessary for an industry restructuring.

The FSC aims to introduce the regulation as early as 2024 after a revision of related laws. The country adopted the rule in January 1997 but was abolished in February 1998 due to the Asian financial crisis.

TO CONSIDER SMALL SHAREHOLDERS FOR TAKEOVER STRATEGIES

The move is expected to help small shareholders share control premiums, which major stockholders have been exclusively enjoying, and reduce losses from takeover deals.

Last year, Seoul-based IMM Private Equity and South Korea’s top department store operator Lotte Shopping Co. took over the management right of a local furniture maker Hanssem Co. by purchasing a 27% stake at 1.5 trillion won ($1.2 billion), or 220,000 won per share. That was almost double of Hanssem’s closing price of 117,500 won a day before the deal was announced.

Hanssem’s shares have lost ground since the acquisition, ending at 45,950 won on Dec. 21, causing complaints among small shareholders.

The mandatory offer rule is likely to raise the status of small stockholders as key negotiation partners for a corporate acquisition deal, industry sources said. Bidders will have to seek takeover strategies, which have been focusing on major stockholders, for those minor investors, they added.

“The introduction of the rule will allow small shareholders to raise their voices in a management right deal,” said an investment banking industry source. “It will be more necessary to set up M&A strategies for small stockholders.”

The move is also expected to increase foreign investments as a lack of protection measures for small shareholders was considered as a factor for the Korea discount, a tendency for local companies to have lower valuations than global peers, according to industry sources.

TO EASE KOREA DISCOUNT

Many developed countries such as the UK, Germany and Japan have already introduced mandatory offer rules. The UK and Germany require bidders to acquire the remaining shares if they buy stakes of 30% or more.

“The rule will help advance the local capital markets and ease the Korea discount,” said an asset manager in Seoul.

Some critiques, however, said South Korea’s planned mandatory offer rule has some loofholes.

The rule is less strict than in other countries since it requires only a stake of 50% plus one share. Bidders may avoid the regulation by acquiring a stake of less than 25%. In addition, the local mergers and acquisitions market may grow ineffective as the rule could hurt industrial restructuring or friendly takeovers.

“We set the mandatory offer ratio at a stake of 50% plus one share, considering expectations that the domestic M&A market may shrink,” said an FSC official. “Once the regulation is settled, we will mull raising the ratio.”

Write to Dong-Hun Lee and Hyeong-Gyo Seo at leedh@hankyung.com
Jongwoo Cheon edited this article.