Mandatory Tender Offer System Gains Traction... What Is Its Impact on the Capital Market? [M&A Alssulsinjab]

A "Mandatory Tender Offer System"
Aims to Protect Minority Shareholders
But Increases Burden on Management

"If it is the same stock, it should be sold at the same price."

There is a growing discussion, particularly among lawmakers, about the need to reform the long-standing practice in corporate mergers and acquisitions (M&A) where only major shareholders are able to sell their shares at a high price by attaching a 'management premium,' while minority shareholders are forced to sell at a much lower price. Following the amendment of the Commercial Act in early July, discussions are continuing regarding further measures to improve corporate governance, including the amendment of the Financial Investment Services and Capital Markets Act (Capital Markets Act). One of the main topics under discussion is the introduction of a 'mandatory tender offer system' in M&A transactions.

Both the ruling and opposition parties have already introduced bills related to the mandatory tender offer system. As a result, there is speculation that the bill could pass the plenary session as early as this regular session of the National Assembly. On July 22, M&A Alssulsinjab analyzed the potential impact of introducing a mandatory tender offer system on both minority and major shareholders, as well as its effect on the M&A market.

After repeated discrimination..."Minority shareholders should also benefit from the premium"

The mandatory tender offer system requires an acquirer who obtains a certain level of shareholding to also purchase shares from other shareholders under the same conditions. The aim is to eliminate price discrimination between major and ordinary shareholders.

Due to the slow pace of corporate governance reform, major shareholders?who are the actual controllers of management?have enjoyed exclusive access to management premiums during M&A transactions in Korea. Minority shareholders, who typically own shares unrelated to control, have not been able to receive this additional value. From the acquirer's perspective, only shares with management rights are valued higher, since acquiring those shares is necessary to transfer control.

In fact, the mandatory tender offer system is not entirely new to the Korean capital market. A similar system was introduced in 1997 but was abolished after just one year due to the aftermath of the foreign exchange crisis. With the previous administration and the Lee Jaemyung government pushing for value-up initiatives and Commercial Act amendments, discussions on reintroducing the system have gained momentum. During the long absence of such a system, cases of minority shareholder harm have repeatedly occurred.

A representative example is KB Financial's acquisition of Hyundai Securities in 2016. At that time, the major shareholder sold shares at 23,000 KRW per share, but the exchange price for minority shareholders was only in the 6,000 KRW range. A recent case involving Lotte Rental is similar. While Hotel Lotte sold its shares at 77,000 KRW per share, Lotte Rental conducted a paid-in capital increase with Affinity for shares priced in the 29,000 KRW range on the same day, resulting in the dilution of ordinary shareholders' equity value.

"If you acquire more than a certain percentage, you must buy other shareholders' shares too"

Given this situation, what specific changes would the introduction of a mandatory tender offer system bring to the domestic M&A market? First, minority shareholders would be given the opportunity to sell their shares under the same conditions as the premium paid to major shareholders by the acquirer. While it would become more difficult to use the strategy of securing only the minimum stake required for management control, minority shareholders would gain a fairer way to dispose of their shares at a reasonable price.

Lee Sangheon, a researcher at iM Securities, described it as "a system designed to prevent indiscriminate expansion of affiliates and to protect ordinary shareholders."

However, there are concerns from the perspective of companies. Previously, it was sufficient to purchase only the minimum stake necessary for management control, but with this system, acquirers would also have to buy shares from minority shareholders, which could sharply increase M&A costs. Some in the investment industry also argue that since most domestic M&A deals involve partial stake acquisitions, making a full tender offer mandatory could even dampen demand-driven M&A activity.

"Buy all shares? Only up to 50%?" The scope of the tender offer is a key issue

According to the bills currently pending in the National Assembly, opinions differ depending on the scope of the tender offer. This means that the scope of the tender offer is the most contentious issue in the legislative process. Some bills require the acquirer to purchase all remaining shares if their stake exceeds 25%, while others require only up to '50% plus one share.' The Democratic Party advocates for the acquisition of all shares, while some lawmakers from the People Power Party support 'partial acquisition,' meaning the acquirer would only need to buy the quantity specified by presidential decree.

There are also concerns that acquirers might deliberately offer a low price to discourage minority shareholders from subscribing, using this as a loophole. To prevent this, some bills include provisions requiring the acquirer's stake to be reduced back below 25% if the subscription rate falls below 50%. This design is based on examples from advanced countries such as the UK, where if an acquirer holds more than 30% of voting shares, they must make a tender offer for all remaining shares under the same conditions. Additionally, if the subscription rate falls below a certain level, the transaction is rendered invalid.

Most European countries, including Germany, the Netherlands, and Spain, require an acquirer who obtains more than 30% of voting shares to make a tender offer to remaining shareholders. The United States does not have such a system, but protects ordinary shareholders through the board of directors' extensive fiduciary duties and a well-developed civil litigation system.

Um Sujin, a researcher at Hanwha Investment & Securities, said, "Ultimately, the goal is to ensure minority shareholders receive fair compensation," adding, "Although there are some differences in the details of the bills proposed under the previous administration, similar bills have been introduced by the Democratic Party this year. Now that the party is in power following the launch of the new government, the initiative is expected to gain further momentum." Following the amendment of the Commercial Act earlier this month, the investment banking industry is watching closely to see if minority shareholders will be able to strike back once again.