M&A Value Enhancement Solutions... Board Governance and Proportional Mandatory Tender Offers

Factors Behind Undervaluation in the Korean Stock Market: M&A Practices
Enhancing Shareholder Value Through Board Conduct Guidelines
Mandatory Tender Offers Should Ensure Premiums for All Shareholders

There is a growing call for the urgent introduction of board governance that requires consideration of shareholder value during mergers and acquisitions (M&A) in order to protect minority shareholder rights and address stock undervaluation. Additionally, experts are emphasizing the need for a mandatory tender offer system based on proportional allocation, which would allow all shareholders to receive the same premium rate.

M&A Practices Causing Undervaluation in Korea... How Japan Approaches It

On June 25, attorney Koo Hyunjoo of Hannuri stated at the Korea Corporate Governance Forum's seminar, “The Challenge of Undervaluation Remaining Even at KOSPI 9000,” held at the Ruby Hall of the Korea Economic Association in Yeouido, Seoul, that “as of June 18, the KOSPI surpassed 9,000, but the ratio of individual companies with a price-to-book ratio (PBR) below 1 remains high at 67.8%, indicating continued undervaluation.” She explained, “The key reason for the Korea Discount is the practice in M&A deals where ordinary shareholders are not given the same opportunity as controlling shareholders to sell their shares.”

The Korea Corporate Governance Forum held a seminar titled "The Undervalued Challenge Remaining Despite KOSPI 9000" on the 25th at the Ruby Hall of the Korea Economic Association in Yeouido, Seoul. Photo by Seung Wook Park

The attempted sale of Lotte Rental last year is a representative case. At that time, the controlling shareholders, Hotel Lotte and Busan Lotte Hotel, agreed to sell more than half of their holdings to global private equity fund Affinity Equity Partners at 77,115 won per share. Under the same transaction conditions, the board resolved to conduct a third-party paid-in capital increase for Affinity at 29,180 won per share. The sale price per share for controlling shareholders and ordinary shareholders differed by more than 2.6 times.

Japan has changed its M&A practices by introducing board governance standards and a mandatory tender offer system. In 2023, the Ministry of Economy, Trade and Industry (METI) announced M&A guidelines requiring boards to consider acquisition proposals from the perspective of the joint interests of shareholders and corporate value. Since last month, with the enforcement of the amended Financial Instruments and Exchange Act, a mandatory tender offer system has also been implemented.

Ryushiro Kodaira, senior writer at Nikkei, explained, “Before the guidelines were issued, Japanese boards often focused on rejecting or concealing acquisition proposals. Since the guidelines, boards have shifted to seriously considering acquisition proposals with a focus on shareholder value.” He added, “As a result, the size of M&A deals in Japan surged from 17.8 trillion yen in 2023 to 35.6 trillion yen last year. Additionally, the cross-shareholding ratio among companies decreased from 7.7% in fiscal year 2022 to 6.2% in fiscal year 2024, showing improvement in corporate governance.”

"Guidelines Needed for Board Conduct... Mandatory Tender Offers Should Be Proportional Allocation"

Attorney Koo emphasized the need for such standards. She stated, “Although general standards were introduced in Korea through amendments to the Commercial Act, there are still insufficient rules regarding acquisition proposals. Therefore, guidelines for board conduct related to acquisition proposals should be established.” She suggested, “The disclosure system should add ‘serious acquisition proposals for the purpose of management control changes’ as a reason for the key event report, and the criteria for a serious acquisition proposal should be clearly defined with reference to the Japanese guidelines.”

Kim Jeongnam, former Managing Director at APG (Netherlands pension asset manager), said, “In Japan, where there is a dispersed ownership and professional management system, boards are sensitive to soft law such as guidelines. However, in Korea, where controlling shareholders effectively dominate the board, strong regulation through legal amendments is essential.”

The necessity of introducing a mandatory tender offer system was also raised. Attorney Koo said, “A mandatory tender offer system should be introduced so that ordinary shareholders can have the same opportunity to sell as controlling shareholders when there is a transfer of control.”

It was also pointed out that the proportional allocation method should be considered when introducing the system. For example, if the controlling shareholders own 60% and ordinary shareholders own 40%, and the acquirer wants to purchase 50% of shares, the transaction would involve 30% from controlling shareholders and 20% from ordinary shareholders, ensuring an equal proportion of sales.

Kim, the former managing director, commented, “Currently, discussions about the mandatory tender offer system focus on full acquisition (100%) or partial acquisition (50% plus one share). However, proportional allocation—where controlling and ordinary shareholders sell shares at the same rate—will determine the success of the system’s implementation. Full acquisition guarantees the same premium for all shareholders but raises concerns about reduced acquisition activity due to higher costs. Partial acquisition can lower acquisition costs but may render the system meaningless if controlling shareholders use separate share purchase agreements (SPAs).”

This content was produced with the assistance of AI translation services.