Financial Services Commission Removes 'Standard Market Price' Regulation for Merger Valuation Between Non-Affiliated Companies

'Enforcement Decree of the Capital Markets Act' Passed at Cabinet Meeting
Mandatory External Evaluation for Merger Price Calculation
Board of Directors Also Required to Prepare and Disclose Opinion Statements

Starting next week, it will no longer be mandatory to use the 'market price (reference stock price)' method when calculating the merger price for non-affiliated companies. Going forward, the merger price can be calculated in a way that is not disadvantageous to common shareholders. Additionally, the board of directors must prepare and disclose a statement of opinion when deciding on mergers between non-affiliated companies.

On the 19th, the Financial Services Commission announced that the amendment to the "Enforcement Decree of the Capital Markets Act and the Financial Investment Services Act" for improving M&A regulations was approved at the Cabinet meeting. The amended Enforcement Decree of the Capital Markets Act will take effect from the 26th.

Currently, the stock exchange ratio between listed companies must be calculated solely based on the 'market price (reference stock price)'. This has continuously resulted in situations favorable to major shareholders but detrimental to common shareholders. A representative example is Doosan Group's attempt to merge Doosan Robotics and Doosan Bobcat (stock exchange ratio 1 to 0.63) as part of its governance restructuring.

Under the current system, the stock exchange ratio between listed companies is always based on the current stock price. This has led to criticism that the intrinsic value of the loss-making company Doosan Robotics and the profitable company Doosan Bobcat is not properly reflected, inevitably resulting in a merger ratio favorable to major shareholders.

The amended Enforcement Decree excludes mergers between non-affiliated companies from the application of the merger price calculation formula. Similar to major countries such as the United States and Europe, it does not directly regulate the merger price but allows for a reasonable merger price to be determined through disclosure and external evaluation.

Furthermore, external evaluation will be mandatory for mergers between non-affiliated companies. The selection process of the external evaluation agency must obtain the consent of the auditor. At this time, institutions involved in the merger price calculation process cannot be selected as the external evaluation agency for the merger.

In addition, the board of directors must prepare a statement of opinion regarding the merger decision process. If there are directors opposing the merger, the reasons for opposition must be specified in the statement and disclosed.

The Financial Services Commission stated, "In addition to improving the merger price calculation regulations for mergers between non-affiliated companies, we will actively pursue additional institutional improvements to strengthen the protection of common shareholders in cases such as mergers and physical spin-offs, which have been pointed out so far."