Why South Korean companies don't get tender offers

Elon Musk’s successful bid to buy out the social media platform Twitter for around $44 billion is a kind of deal unlikely to happen in South Korea and makes me envy the dynamism of the US capital market.

The tender offer for Twitter by the world's richest man also reminds me of a big difference between the US and South Korean capital markets, when it comes to a board of directors' obligation to act in the best interest of shareholders. 

If the social media company is listed in Korea, Musk may approach its major shareholders including Vanguard Group, Morgan Stanley and BlackRock to buy out their shares at a premium, leaving other shares held by minority shareholders intact.

To acquire a publicly listed company in the US, the bidder generally makes a tender offer, either friendly or unfriendly, to buy out the remaining shares for a higher price. To acquire Harman in 2017, Samsung Electronics Co. launched a public bid for the US audio electronics company.

A tender offer is not mandatory but deemed as a necessary step to acquire a US-listed company. Otherwise, the target company's board of directors could be sued by shareholders for failing to provide them with an opportunity to sell off shares to a new buyer on equal terms.

If a tender offer is rejected by a company's board, the bidder may resort to a general shareholder meeting to win over shareholders.

Even if a board of directors decides to accept a takeover bid, it is required that they look out for other potential bidders who may offer better terms. If not, the board may face a class-action lawsuit from shareholders.

Twitter’s board had reviewed Musk's offer with the assistance of its two advisors JPMorgan and Goldman Sachs. They agreed to sell the company to the Tesla Inc. founder for $54.2 in cash for each Twitter share, as proposed by Musk two weeks ago.

FIDUCIARY DUTY

Behind the successful management buyouts in the US is a fiduciary duty, an obligation required for a shareholder proxy to act in the best interests of both the shareholders and the company.

South Korea’s commercial law stipulates the duty as well. But it specifies the obligation only for the interest of a company, not shareholders.

That explains the absence of M&As by tender offer in South Korea.

The fiduciary duty of a board of directors applies not only to M&As, but to other major decisions such as company spin-offs and IPOs in the US.

If that was also the case in Korea, the controversial practices among Korean conglomerates of splitting off a business into a new entity and taking the new unit public would have been blocked by their boards on concerns over the conflict of interests between shareholders.

Back in 2015, Google Inc. established its holding company Alphabet. Its shareholders gave the nod to the holding company launch as each Google share was swapped into one Alphabet share for all its shareholders and the holding firm's subsidiaries remained unlisted.

To boost shareholder interests in Korea, ruling Democratic Party member Lee Yong-woo has proposed a revision to the commercial law to add "the interests of shareholders" to the purposes of a company board's fulfillment of fiduciary duties.

If the revised bill is passed, boards of directors in Korean companies will be given more responsibilities and roles, which would eventually facilitate management buyouts and help investors have a better prediction of a company's future.

However, the increased benefits for shareholders should come with better management protection tools such as a dual-class structure of shares.

When Google issued new shares in Alphabet in 2015, it divided them between shares with voting rights and those without.

President-elect Yoon Suk-yeol, set to take office on May 10, pledged to introduce a dual-class stock structure for startups, allowing for two or more classes of shares with different voting rights. 

If the incoming government improves the efficiency of the capital markets and shareholder protection in ways that benefit minority shareholders as well, Yoon will go down in history as the president who eliminated the Korea Discount, or persistently low valuations of Korean stocks.

Write to Chang Jae Yoo at yoocool@hankyung.com
Yeonhee Kim edited this op-ed.