South Korea to Mandate Fair Value for Listed Company Mergers, Curbing Shareholder Exploitation

South Korea is set to implement a significant reform in its capital markets, requiring listed companies to adopt "fair value" in merger assessments, moving away from the current practice of relying solely on stock prices. This legislative shift, approved by parliament, is slated to take effect by late November.

The core of the reform lies in preventing controlling shareholders from unfairly benefiting from merger ratios. Historically, companies have been accused of manipulating stock prices downwards before mergers to create favorable terms for themselves, often at the expense of minority shareholders. The infamous 2015 merger of Samsung C&T and Cheil Industries, where the founding family's stake was consolidated, serves as a prominent example of such alleged practices.

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The amendment to the Capital Markets Act, passed by the National Assembly today, requires that when listed companies merge with other corporations, the merger price be determined by 'fair value' that reflects assets and future value, not just stock prices.

More recently, the proposed merger and spin-off of Doosan Bobcat, Doosan Enerbility, and Doosan Robotics faced criticism for allegedly undervaluing Doosan Bobcat, thereby benefiting the owner family while disadvantaging small shareholders. The new law aims to close these loopholes by mandating a holistic valuation that incorporates asset and future earning potential, not just the immediate market price.

This comprehensive approach will apply to all forms of corporate restructuring, including mergers, spin-offs, and significant asset acquisitions. The process will also be strengthened with requirements for board opinions on merger rationale and expected benefits, external evaluations of fairness, and disclosure of special-interest relationships in inter-affiliate transactions. The Financial Services Commission stated its commitment to continuously improving the system to ensure minority shareholder rights are adequately protected during these crucial corporate transactions.

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As corporate restructuring activities are important transactions that inject dynamism into the overall industry and capital markets, we will continue to improve the system to ensure that the rights and interests of general shareholders are fully protected in the process.