Is the Bear Hug Coming? ... New System to Aid Minority Shareholders Introduced [Weekend Money]

"Korean-Style Bear Hug Expected to Normalize Corporate Value"
"Fake Offers Can Be Judged by Proposal Terms"

The introduction of the Korean-style Bear Hug (K-Bear Hug) is expected to strengthen the external checks and supervisory functions of the mergers and acquisitions (M&A) market, prompting undervalued companies to proactively enhance their value. Bear Hug is one of the M&A strategies in which the acquiring party makes a public purchase offer to the target company at a price higher than the market value, without prior notice. This system requires the management and the board of directors to make prompt decisions. Its name originates from the image of a bear grabbing its prey tightly with its forepaws, immobilizing it, and applying pressure.

According to Hanwha Investment & Securities, the introduction of the Korean-style Bear Hug is expected to normalize the value of undervalued companies. Earlier, on September 3, Oh Ki-hyung, head of the K Capital Market Special Committee of the Democratic Party of Korea, sponsored an amendment to the Capital Markets Act, known as the Korean-style Bear Hug Act. The amendment stipulates that if a listed company receives an acquisition proposal that could significantly impact shareholder value, the board of directors must immediately disclose the contents of the proposal and its future review plans. Additionally, the board must document its opinion—whether it accepts, rejects, or remains neutral on the public tender offer—as well as the progress of discussions and the relevant reasons, in the major matters report.

Currently, most listed companies make vague disclosures such as "nothing has been specifically decided" even upon receiving an M&A proposal. Ordinary minority shareholders find it difficult to recognize not only the specific terms but even the existence of the proposal itself. Major shareholders, management, and the board of directors, who are aware of the details of such M&A proposals, could potentially engage in prior share trading to pursue personal gain.

However, if the Korean-style Bear Hug becomes established, acquisition proposals from outsiders will be disclosed immediately, making it difficult for the board or management to unilaterally reject such offers. In addition, regular minority shareholders could have the opportunity to sell their shares at attractive prices upon learning about acquisition proposals.

The market's checks and supervisory function over undervalued companies will also be reinforced. Under the Bear Hug system, undervalued firms are more likely to become M&A targets. The more frequent the external M&A attempts, the more actively management and the board will have to work to boost the share price. If the board of directors rejects an acquisition proposal without just cause, there could be the risk of lawsuits for breaching the duty of loyalty to shareholders.

Of course, the misuse of the Korean-style Bear Hug for fake proposals has been identified as a potential side effect. External parties may make acquisition proposals solely to manipulate the stock price and gain short-term profit, without serious acquisition intent. However, in such cases, it remains the responsibility of the target firm's management and the board to judge whether the proposed acquisition price and terms are specific, whether there are long-term management strategies following the acquisition of control, and whether the bidder’s funding plans are realistic.

Um Sujin, a researcher at Hanwha Investment & Securities, stated, "The mandatory public tender offer system, which is likely to pass the National Assembly in the second half of this year, is in line with the Korean-style Bear Hug, as it helps address the issue of regular minority shareholders being excluded from decision-making and opportunities to recover investment capital." She added, "If both the proposed amendment to strengthen inheritance and gift tax for listed companies with a price-to-book ratio (PBR) of less than 0.8, and the Korean-style Bear Hug, take root, it would help ease the chronic issue of depressed share prices among domestic listed companies."

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