Foreign Boards Block 'Bear Hugs'... Implications Ahead of K-Bear Hug Law [Weekend Money]

Criteria for Determining a Genuine Acquisition Proposal

"Acquisition Price and Funding Capability Must Be Assessed"

It has been suggested that if the so-called "Korean-Style Bear Hug Law" (K-Bear Hug Law) is introduced, companies listed on the stock market, upon receiving an acquisition proposal, should assess whether the proposal is genuine by examining factors such as the potential for synergy and increased efficiency between the acquiring and target companies, and whether the bidder is offering an appropriate acquisition price.

Hanwha Investment & Securities recently analyzed cases over the past ten years in which foreign boards of directors rejected acquisition proposals. On September 3, an amendment to the Capital Markets Act, commonly referred to as the Korean-Style Bear Hug Law, was introduced, leading to heightened interest in determining what constitutes a bona fide acquisition proposal.

The Korean-Style Bear Hug Law would require the board of directors of a listed company that receives an acquisition proposal to publicly disclose the terms of the proposal and their review plan, and to express their opinion about any tender offer through an independent process. The law also mandates that the main details, including the progress of discussions and relevant reasons, be reported in a material disclosure statement. Until now, ambiguous disclosures such as "nothing has been specifically decided" have been common even when listed companies receive acquisition proposals, making it difficult for minority shareholders to even be aware that a proposal has been made.

With the introduction of the Korean-Style Bear Hug Law, the board of directors will be able to decide to support or oppose an acquisition, taking into account anticipated effects, the rationality of the acquisition’s purpose, and whether alternatives exist.

Overseas, common reasons for opposition include a low acquisition price, uncertainty regarding the funding of the acquisition, and the possibility that minority shareholders may not be able to sell all of their shares even if they accept the tender offer. Last month, Magna Holdings announced an acquisition offer to purchase a 31% stake in the Indian corporate travel service company Yatra Online for $1.10 per share, but on September 1, the Yatra Online board unanimously rejected the offer for these reasons.

There have also been cases in which the acquisition proposal was rejected due to limitations on the rights of minority shareholders in a tender offer. The board of GE Healthcare, for instance, opposed Potemkin’s small-scale tender offers in January and again in March, recommending that shareholders abstain from participating in Potemkin’s offers. The board cited the low acquisition price and the limited right to withdraw tender subscriptions as factors in its decision.

In other cases, an acquisition proposal was rejected by comparing the terms with those of a previously proposed merger and acquisition (M&A) contract. In January, the board of Warner Bros. Discovery rejected Paramount Skydance’s acquisition proposal after comparing its terms with an ongoing M&A agreement with Netflix. Specifically, the board assessed that if the company were to break the contract with Netflix and instead accept Paramount Skydance’s acquisition proposal, the resulting penalties and interest expenses would outweigh the benefits. In addition, the board judged that there was significant uncertainty about whether Paramount Skydance could close the transaction, and that the resulting loss to shareholders could be substantial if the acquisition failed.

Sujin Um, a researcher at Hanwha Investment & Securities, stated, "Boards of companies receiving acquisition proposals must verify whether the acquirer has the means to secure the necessary funds. Before initiating acquisition procedures, it is also important to review the relative size of the bidder and the target company, their market shares, and the regulatory environment of the industry in question, in order to prevent the risk of the deal’s failure due to denial of approval by supervisory authorities."

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